June 2018

This is from a recently filed compaint at the U.S. Court of International Trade:

Plaintiffs American Institute for International Steel, Inc. (“AIIS”), Sim-Tex LP (“Sim-Tex”), and Kurt Orban Partners, LLC (“Orban”), by and through their attorneys, hereby submit their complaint in this action seeking a declaratory judgment that section 232 of the Trade Expansion Act of 1962, as amended, 19 U.S.C. § 1862 (“section 232”), is unconstitutional as an improper delegation of legislative power to the President, in violation of Article I, section 1 of the Constitution and the doctrine of separation of powers and the system of checks and balances that the Constitution protects. Plaintiffs also seek an order of this Court enjoining defendants from enforcing the 25% tariff increase for imports of steel products and other trade barriers imposed by Presidential Proclamation 9705 of March 8, 2018 (the “25% tariff increase”), as subsequently amended. ...

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11. Because section 232 allows the President a virtually unlimited range of options if he concludes, in his unfettered discretion, that imports of an article such as steel threaten to impair the national security, as expansively defined, section 232 lacks the intelligible principle that decisions of the United States Supreme Court have required for a law not to constitute a delegation of legislative authority, which would violate Article I, section 1 of the Constitution.

12. Section 232 also lacks procedural protections that might limit the unbridled discretion that the President has under it. ...

13. Section 232 does not have a provision for judicial review of orders by the President under it, and because the President is not an agency, judicial review is not available under the Administrative Procedure Act, 5 U.S.C. § 706. ...

At the last DSB meeting, the U.S. offered a detailed criticism of the Appellate Body's recent practice of taking longer than 90 days to circulate its reports. It's too long to quote the whole thing, but here is a part of it:

5. STATEMENT BY THE UNITED STATES CONCERNING ARTICLE 17.5 OF THE UNDERSTANDING ON RULES AND PROCEDURES GOVERNING THESETTLEMENT OF DISPUTES

The United States requested this agenda item to draw Members’ attention to the repeated issuance of Appellate Body reports beyond the 90-day deadline mandated in the DSU.

For too long, the Appellate Body has ignored the clear text of the DSU. We want Members to read that rule together and to decide: do the words in the WTO Agreement matter? Or is the Appellate Body free to disregard and effectively re-write those words whenever it thinks that is necessary or appropriate?

Similarly, for too long, WTO Members have failed to fulfill their responsibility, acting through the DSB, to apply and administer the relevant rules. Although some Members have spoken out, by failing to acknowledge and address this problem collectively, we have worsened the problem, as the facts will show.

Through this statement, the United States intends to re-start a discussion among Members on whether we understand and respect the rules we have written. To facilitate that discussion, in this statement we will highlight five aspects of this issue for Members.

First, we will highlight the text of Article 17.5 and the mandatory requirement to complete appeals in no more than 90 days, with no exceptions.

Second, we explain that the Appellate Body’s pre-2011 practice respected this rule and, when there were deviations, it was only with the agreement of the parties.

Third, we will draw Members’ attention to the inexplicable change in the Appellate Body’s practice in 2011.

Fourth, we will discuss the result of this change; namely, appeals are taking longer and longer.

Finally, we will conclude by explaining the serious consequences for the WTO dispute settlement system of the Appellate Body’s repeated, flagrant breach of Article 17.5.

Here is some data on the timing of the circulation of Appellate Body reports since 2016:

There are a lot of elements to this issue, and I'm not going to address all of them, but I do have a few thoughts.

First, there are some cases where it seems like the responding party is appealing certain issues which it has very little chance of winning, and even some cases where it has little chance of winning any issue and is appealing the case only for the purposes of delaying implementation. That may make sense politically, and they have the right do so, but this approach will have the impact of slowing down the Appellate Body's work as it deals with these nuisance appeals.

Second, the Appellate Body provides some background information in its reports that I assume is designed to make the report easier to understand, but it may not always do so. For example, it will usually give a summary of the panel's findings, which takes some time to prepare. This is a nice idea in theory, but often in practice I find that the summaries are too short to be helpful. It's not clear to me that the effort it expends on this is worth it.

Third, the Appellate Body has adopted what I consider a very expansive approach to DSU Article 11, and as a result we see quite a lot of Article 11 claims these days. In my view, a stricter test for Article 11 is more appropriate based on the text, and such an approach would have the side benefit of reducing the burden on the Appellate Body as the number of these appeals is reduced.

Finally, given the complexity and length of WTO complaints today, and the high number of appeal claims that are pursued, 90 days may not always be realistic and it is worth rethinking what a reasonable time period should be. Maybe 120 or 150 days would be better. I do think that a 90 (or 120 or 150) day limit could and should be met in most cases, though, and if it looks like it is not going to be met, the Appellate Body should explain the reasons to the parties first and get their agreement.

A couple years ago, I blogged about the first appellate decision under Canada's Agreement on Internal Trade, which was on dairy products. The second decision has just been circulated, this time on beer. (The Canadian Free Trade Agreement recently replaced the AIT, so aside from any ongoing AIT cases, future cases will be under the CFTA.)

I may have more to say on the substance later, but for now I just wanted to note a difference between the two appeal panels' approach to the standard of review for interpretation of the AIT. This is what was said in the dairy case:

91. This brings us to the fundamental question to be resolved with respect to standard of review. When an Appellant alleges that a Panel erred in interpretation of the AIT, does the Appellate Panel review the Panel on a standard of correctness or a standard of reasonableness?

92. In our view, the appropriate standard is reasonableness.

93. As we have explained above, many of the considerations that induce a court to exercise deference towards an administrative tribunal on judicial review do not apply in the relationship between the Appellate Panel and a Panel under the AIT. Likewise, many of the considerations that govern an appeal court’s oversight of lower courts do not apply in the relationship between the Appellate Panel and a Panel under the AIT.

94. One consideration however that does apply in both the judicial review context and in the present context is the relative expertise of the generalized reviewing body as compared to the specialized decision maker. Unlike the Panel, we do not have “expertise or experience in matters covered by this Agreement”. Such experience provides a basis for a practical interpretation of the Agreement in a manner that best achieves its objectives.

By contrast, this is what was said in the beer case:

46. In terms of the respective roles of panels and Appellate Panels under the AIT, the underlying legislation – the AIT – clearly provides for a full review of the Panel’s decision by the Appellate Panel and permits the Appellate Panel to “confirm, vary, rescind, or substitute the Report in whole or in part, or refer the matter back to the Panel for re-hearing”. That broad authority suggests the Appellate Panel is not required to be deferential to the original Panel report.

47. Even if we were to accept the Newton considerations, we do not consider that significant deference is required.

48. In terms of the nature of the question in issue, Appellate Panel review will almost always involve a review of the panel’s interpretation of provisions of the AIT. Our conclusions in respect of those interpretations of the AIT may have an impact well beyond the parties to the dispute.

49. There is nothing in the AIT itself that clearly requires an Appellate Panel to exercise deference with respect to panel decisions. Rather, the agreement suggests that an Appellate Panel may conduct a full and unrestrained review of the Panel decision.

50. On pure questions of law, the standard of review is correctness, and we are free to replace the opinion of the Panel with our own. In sum, we considered that the Appellate Panel has a broad jurisdiction to review the panel decision in this appeal and, in conducting that review, it should be guided by the Supreme Court’s decision in Housen.

I remember being surprised by the deference shown in the dairy case, and I can imagine that the beer standard of review will prevail going forward.

Only Mexico and India included a non-violation claim under GATT Article XXIII:1(b):

Mexico: "In addition to, and independently of, the multiple violations of the WTO obligations identified above, Mexico considers that the benefits accruing to Mexico directly and indirectly under the GATT 1994 are being nullified or impaired as a result of the application of the measures identified above within the meaning of Article XXIII:1(b) of the GATT 1994."

India: "In addition to, and independently of, the multiple violations of the WTO obligations identified above, India considers that benefits accruing to India directly and indirectly under the GATT 1994 are being nullified and impaired as a result of the application of the measures identified above within the meaning of Article XXIII: 1(b) of the GATT 1994."

4.6 The United States said that Article XXI applied to any action which the contracting party taking it considered necessary for the protection of its essential security interest. This provision, by its clear terms, left the validity of the security justification to the exclusive judgement of the contracting party taking the action. The United States could therefore not be found to act in violation of Article XXI. ...

But it also recognized that a non-violation claim was still available:

4.9 The United States recognized that a measure not conflicting with obligations under the General Agreement could be found to cause nullification and impairment and that an invocation of Article XXI did not prevent recourse to the procedure of Article XXIII. ...

Is this still the U.S. position on the relationship of GATT Article XXI and non-violation claims? Or will it now argue that non-violation claims are precluded?

Donald Trump has a negotiating tactic he really likes: Threaten to do something someone else will really hate, and then offer to stop if they give you what you want.

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One of his tactics on trade, for example, is to impose a variety of tariffs on Canada and Mexico on "national security" grounds in hopes of getting them to agree to modify NAFTA according to his terms.

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You would think that a guy who so highly rates the importance of looking strong would know better than to put his counterparties in a position where giving him what he wants makes them look weak and small.

And yet, he has done that, over and over.

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There will be occasions where Trump's tactic of hostage-taking and threatening and generally being too much of a pain to be worth fighting against will work. But on average, it will not.

The Office of the United States Trade Representative (USTR) today released a list of products imported from China that will be subject to additional tariffs as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property.

On May 29, 2018, President Trump stated that USTR shall announce by June 15 the imposition of an additional duty of 25 percent on approximately $50 billion worth of Chinese imports containing industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy. Today’s action comes after an exhaustive Section 301 investigation in which USTR found that China’s acts, policies and practices related to technology transfer, intellectual property, and innovation are unreasonable and discriminatory, and burden U.S. commerce.

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The list of products issued today covers 1,102 separate U.S. tariff lines valued at approximately $50 billion in 2018 trade values. This list was compiled based on extensive interagency analysis and a thorough examination of comments and testimony from interested parties. It generally focuses on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. The list does not include goods commonly purchased by American consumers such as cellular telephones or televisions.

This list of products consists of two sets of U.S tariff lines. The first set contains 818 lines of the original 1,333 lines that were included on the proposed list published on April 6. These lines cover approximately $34 billion worth of imports from China. USTR has determined to impose an additional duty of 25 percent on these 818 product lines after having sought and received views from the public and advice from the appropriate trade advisory committees. Customs and Border Protection will begin to collect the additional duties on July 6, 2018.

The second set contains 284 proposed tariff lines identified by the interagency Section 301 Committee as benefiting from Chinese industrial policies, including the “Made in China 2025” industrial policy. These 284 lines, which cover approximately $16 billion worth of imports from China, will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, USTR will issue a final determination on the products from this list that would be subject to the additional duties.

One view of the administration's approach to trade negotiations is that the Section 232/301 tariffs are all about creating leverage to open foreign markets. Thus, USTR's announcement about duties being imposed under Section 301 is supposed to induce China to make more significant concessions in the negotiations that have been taking place and that will continue. As Ambassador Lighthizer said: "Our hope is that it doesn't lead to a rash reaction from China. I'm hoping that they view this as an opportunity to move to the next level. We hope this leads to further negotiations and to China changing its policies." (Of course, it may be the case that the administration does not, in fact, care if other countries open their markets. Rather, it is just looking for an excuse to impose tariffs.)

At the end of all this, political scientists and others are going to have some wonderful material to study in relation to Trump's negotiating strategy. The results are not in yet, but eventually we will have some good data on the impact of both the 232 and 301 tariffs on trade negotiations.

What impact will the Section 232 steel and aluminum tariffs have on trade discussions with Canada, Mexico, the EU, South Korea, Argentina, Brazil, Australia, China, Japan and others? So far, aside from reports of some very minor amendments to KORUS, no one has liberalized in response to this pressure. So if the argument is that the tariff threats lead to liberalization, there is not much evidence of this yet. On the other hand, South Korea has agreed to restrict some of its exports, as have Argentina and Brazil to a lesser degree (Australia has agreed to something, but I'm not sure what it is). So if the tariffs are just supposed to lead to "concessions" of some sort, there is better evidence. Unfortunately, these particular concessions will harm the U.S. economy.

And what impact will the Section 301 tariffs have on trade talks with China? How does it compare to an approach that focuses on WTO complaints or normal negotiations? Will we be able to compare the U.S. approach to what the EU is doing and see what works better?

Just about everyone, including me, is pretty skeptical of the administration's approach, partly because we don't think it will work to open foreign markets, and partly because of the more general damage it does to the system and to U.S. credibility in future negotiations. Perhaps the silver lining here is that in the end, we will have some good evidence that this strategy does not work, so no one will try it again.

For those interested in matters of treaty interpretation and legal reasoning, here is a new paper on "The Use of Object and Purpose by Trade and Investment Adjudicators: Convergence without Interaction". It analogizes the practice of WTO and ISDS tribunals to the story of "The Uncanny Case of the Jim Twins, Two Estranged Twins Who Led Identical Lives" (as reported in Ripley's Believe It Or Not). From the paper's conclusion:

There is a natural tendency in the literature to associate "cross-fertilization" and judicial "interaction" with "convergence", and to associate "isolation" and "fragmentation" with "divergence". In relation to certain kinds of issues, however, there appears to be the possibility of parallelism and convergence in practice without any express form of interaction and cross-fertilization, without any express reliance on prior precedent, and without any demonstrated mutual awareness of the practice of other international tribunals. This is the phenomenon of convergence without interaction.

219. Indeed, it is well established by judgments of the International Court of Justice (the “ICJ”) and investment arbitration awards that, unless a treaty contains specific wording granting full discretion to the State to determine what it considers necessary for the protection of its security interests,286 national security clauses are not self-judging.

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286 Self-judging “essential security interests” provisions are far from being unknown in international law. See, for instance, Article XXI of the General Agreement on Tariffs and Trade 1947 (“GATT”): “Nothing in this Agreement shall be construed: (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…” ...

There's not much relevance here for a WTO panel or the Appellate Body considering the issue as part of a WTO complaint, but I thought it was worth noting.

Q Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that —

THE PRESIDENT: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be.

Q How did it go down?

THE PRESIDENT: And no subsidies. I even said no tariffs. In other words, let’s say Canada — where we have tremendous tariffs — the United States pays tremendous tariffs on dairy. As an example, 270 percent. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?

We have to — ultimately, that’s what you want. You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance. I mean, that would be the ultimate thing. Now, whether or not that works — but I did suggest it, and people were — I guess, they got to go back to the drawing and check it out, right?

But we can’t have — an example — where we’re paying — the United States is paying 270 percent. Just can’t have it. ...

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In fact, Larry Kudlow is a great expert on this, and he’s a total free trader. But even Larry has seen the ravages of what they’ve done with their tariffs. Would you like to say something, Larry, very quickly? It might be interesting.

MR. KUDLOW: One interesting point, in terms of the G7 group meeting — I don’t know if they were surprised with President Trump’s free-trade proclamation, but they certainly listened to it and we had lengthy discussions about that. As the President said, reduce these barriers. In fact, go to zero. Zero tariffs. Zero non-tariff barriers. Zero subsidies.

It's hard to know what to make of this "free-trade proclamation," because reducing trade barriers is what other countries are promoting, and Trump keeps resisting. That's what TPP was, and that's what NAFTA is. So how is everyone supposed to react to his call for such broad trade liberalization? My view is that the other G7 leaders should accept his proposal, publicly endorse it, and suggest a date to begin the negotiations. Here's why I think this is the right approach.

First of all, Trump's talk about trade deficits (mentioned elsewhere in his remarks) is nonsense, but there's nothing that can be done about his views on this. We can line up a thousand economists to explain why it's nonsense, but it won't change his mind. Note that he's not the only one who thinks this way. Many other politicians do, and you can even find 2 or 3 economists who agree. So that's a lost cause issue and we should just ignore it.

On the other hand, talk of specific tariffs, barriers, and subsidies is very helpful, and we should focus on those. Those do exist and are a problem. Trump may genuinely believe there is an imbalance here, with Canadian, EU and Japanese tariffs, trade barriers, and subsidies far outweighing U.S. ones. A negotiation would be an opportunity to show him the reality. When he points to Canadian agriculture tariffs, the Canadians can point to U.S. agriculture subsidies. When he points to European auto tariffs, the Europeans can point to U.S. truck tariffs. And then they can keep going down the list: Buy American procurement, the Jones Act, barriers to trade in legal and medical services, anti-dumping abuses, etc.

The Canadians can do this in the context of the NAFTA talks. The EU could propose new transatlantic trade talks. Japan could remind Trump about the TPP, or agree to bilateral talks. (And everyone seems to accept that subsidies have to be negotiated multilaterally, so maybe the better idea is to propose this all be done at the WTO, rather than bilateral talks.)

Now, I'm not saying there is a great chance of success on any of this. Most likely, the best we could hope for is that these talks go about the same as other talks, with a little progress on a few tariffs, trade barriers, and subsidies. That's the nature of these things.

But Trump just called for going "tariff-free," "barrier-free," and "subsidy-free," and it seems to me that accepting his suggestion and giving it a try is better than the alternative, which may be escalating tit-for-tat tariffs.

Q Are you close to a deal on NAFTA? Your Press Secretary said (inaudible).

THE PRESIDENT: So two things can happen on NAFTA. We’ll either leave it the way it is, as a threesome deal with Canada and with the United States and Mexico, and change it very substantially — we’re talking about very big changes. Or we’re going to make a deal directly with Canada and directly with Mexico. Both of those things could happen.

If a deal isn’t made, that would be a very bad thing for Canada and it would be a very bad thing for Mexico. For the United States, frankly, it would be a good thing. But I’m not looking to do that. I’m not looking to play that game.

So we’re either going to have NAFTA in a better negotiated form, or we’re going to have two deals.

Q And does it have to have a sunset clause in it?

THE PRESIDENT: It will have a sunset. You have the two sunsets. I mean, you have an ISDS provision and a sunset provision. They’ve been very heavily negotiated. You have two sunsets, two concepts of sunset. We’re pretty close on the sunset provision. Okay?

Q Like five years or —

THE PRESIDENT: Well, we have one that’s five years; you know it very well. You’ve studied this very well. Congratulations. That’s right. You have one group that likes to have five years, and then a renegotiation at the end of five years. And you have another group that wants longer because of the investments. But we’re pretty close.

I've had a couple interactions with people -- online and in person -- who argued for having a sunset clause in NAFTA (i.e., NAFTA expires and terminates in five years, unless the parties affirmatively agree to renew it). It's one of the least convincing arguments I've ever heard, and I wasn't even sure if they believed in it. I certainly understand why people who oppose trade agreements want them to be sunsetted, but in my view they don't have anything resembling a principled policy argument for doing this.

If the sunset clause is an item being put forward as a "concession" to be negotiated away, that's fine. But I hope that someone is telling Trump (and also telling his senior trade people) that there is no chance of having a sunset clause that involves automatic expiration in NAFTA or any trade agreement. No other government will agree to it, and neither will Congress.

(I'm not really sure what he means by "another group that wants longer because of the investments." I could speculate, but it would probably be wrong.)

Comments by Steve Charnovitz on US Department of Commerce Section 232 Investigation of Automobiles, DOC-2018-0002

June 8, 2018

As I noted in my April 26, 2017 comments on the 232 Steel investigation, “the idea that imports of goods, services, or capital could undermine national security is farfetched”[1] My observation was supported by the subsequent impairment finding by the Commerce Department which offered no evidence that steel imports are impairing national security or that a hefty tariff will safeguard national security. Had the Department taken my comments into account, Secretary of Commerce Ross might have avoided all of the damage to the US economy and US national security that has occurred since then as a result of the US steel and aluminum actions. The evidence that the Department did not take my comments into account is that the impairment decision omits my comments from the list of the public comments.

The issue now before the Department is the automobile sector. Having a ready supply of automobiles and auto parts is important to the US economy and to US national security, but whether these cars or parts are made in the United States or in other countries is not particularly important to US consumers, to the military, or to US industry generally. A high level of domestic production in the auto sector is of interest to domestic automakers and autoworkers, but those are special interest concerns that are separable from the general interest in strong US economic and military security.

Unfortunately, Section 232 does not distinguish clearly between the public interest and the interests of particular industries in receiving import protection. Secretary Ross and President Trump could find that a high tariff on imported automobiles from all countries or from particular allies will help to safeguard national security even though such a finding would be at variance with economic and political realities. The problem is that Section 232 lacks any intelligible principle to govern the actions of the Commerce Department and the President on issues that should be determined by the Congress. For that reason, I now believe that Section 232 violates the US Constitution.

In conducting its autos investigation, I would urge the Department to keep three key points in mind:

First, the best way to keep the US auto industry strong is for it to be in constant dynamic competition with innovative auto companies in other countries and for US companies to be able to export to open foreign markets. Any US government policy that shelters domestic companies from foreign competition will ultimately make those companies flabby and reduce US employment in high wage, high skill jobs. Also, imposing protection on other countries will inevitably lead to counterbalancing foreign actions to prevent export opportunities for US companies. Therefore, even if better priced imports of autos or auto parts are hurting particular US companies, the Secretary should still recommend inaction under Section 232.

Second, increased tariffs (or even worse quotas) in the auto sector will violate the rules of the World Trade Organization and the rules of applicable free trade agreements. For the United States to be an international law scofflaw will lower the standing of the United States in the world community and undermine the effectiveness of international trade agreements. By its many actions to sabotage the World Trade Organization, the Trump Administration has reduced the potential for the WTO to help open foreign markets to US exporters. This dark shadow on world trade will reduce the economic welfare of most US industries, and lead to unemployment, decreased revenues into the Treasury, loss of skills, and loss of investment which are among the factors noted in 19 USC §1862(b).

Third, the import adjustment authority in Section 232 is much more likely to impair national security than it is to safeguard national security. As the implementation of the steel tariffs has shown, the arbitrary decisions of quotas, tariffs, and negotiations that have been carried out under Section 232 have deeply damaged US relationships with its closest allies such as Canada, Mexico, South Korea, Japan, Australia, and the European Community. In other words, the Section 232 cure been much worse for the patient than the Section 232 disease of alleged non-competitiveness of the US steel industry. Although many critics of the Trump Administration’s Steel actions have suggested that the US animus should be focused on China rather than other countries, seeking to protect US industries from Chinese imports is just as debilitating to the American economy as seeking to erect tariff walls against Canada and Mexico. Obviously, Canadian productivity is not a threat to US national security, but neither is Chinese productivity.

Fourth, although we are now in the second year of Secretary Ross’s leadership at the Commerce Department, he continues to neglect sorely needed initiatives on policies to enhance US competitiveness. Every time I see Secretary Ross on TV talking about Section 232, I lament his missed opportunity to be talking up the positive side of the Commerce Department’s jurisdiction on key issues such as export promotion, advanced technology, economic development, data generation and analysis, patents, and the protection of the atmosphere and oceans.

"Thanks to Anthea Roberts for enhancing UNCITRAL's own transparency efforts regarding the recent working group meeting in New York, and posting such a treasure trove of State comments. I and a team of Boston College Law students were also in New York delivering a set of working papers in support of states' efforts to get third party funding reform on to the UNCITRAL agenda. Here is a link to the executive summary of that work, with references at the back to specific online working papers." http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=2130&context=lsfp

As explained in a previous post, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions on states’ concerns about investor-state dispute settlement. To facilitate discussions about the desirability of reforms and their potential nature, we have organized these quotes into key themes that emerged during the meetings. This blog sets out quotes about costs, transparency, third party funding and counterclaims. The other blogs deal with concerns about:

We avoid editorializing because we think that it is important for other stakeholders to hear states’ concerns expressed in their own words. We have grouped states’ concerns under headings but otherwise have kept the interventions on each sub-topic in the order in which they were made. For an analytical framework for understanding these reform dynamics, see Anthea Roberts, Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration, 112 AJIL _ (2018) (forthcoming).

Costs & duration of arbitral proceedings

SOUTH AFRICA – on significant costs of arbitration: “In terms of the issue of costs when it comes to ISDS, we believe that the amounts at stake in investment treaty arbitration are often very high. Claims for compensation do amount to billions of dollars in most cases and in this context entering into treaties with the investor dispute settlement clauses carry significant financial costs for governments particularly the developing countries whose fiscal position can be seriously affected even when cases have been discontinued or when the outcome is said to be in favor of the state. The state will usually have to bear the exorbitant costs of legal defense and arbitrators fees. Furthermore large claims may serve to sustain threats of arbitration increasing the bargaining power of investors in informal discussions with governments to water down regulatory measures or to settle a dispute.”

EUROPEAN UNION – on significant costs of ISDS and the relationship with consistency and predictability: “We think that the system has an effect of increasing those costs and hence by looking at the system we may be able to identify ways to gradually bring about reductions and these costs. We see this happening in three ways. The first way is because the system as it currently functions does not bring about predictability and does not bring about consistency. What does this mean. It means that in any given case before any freshly constituted ad hoc tribunal, a lawyer who is doing his or her job properly will make any possible argument that can be made legally in that particular situation. It doesn’t matter if that particular legal argument has been dismissed on multiple occasions by other tribunals. It may be the case that that particular ad hoc tribunal will accept the argumentation and so any diligent lawyer will have to make that argument again. So we think increasing and dealing with the issue of predictability and consistency will help address the issue of costs.”

EUROPEAN UNION – on significant costs of ISDS and selection of arbitrators: “In each case the lawyers will spend time thinking about strategizing as to who the arbitrators best suited for that particular case would be and they will spend time thinking about which arbitrators are most likely to support their particular argument in that particular case. And how any particular arbitrator would interact with other arbitrators and how they might predict that might affect the outcome of the case. And that obviously is a significant part of the costs of the legal fees of any particular case.”

EUROPEAN UNION – on multiple appointments being a systemic issue affecting costs: “Many arbitrators have multiple appointments. They are often managing a large number of arbitrators and a large number of cases, and that clearly also puts pressure on their time which is understandable and impacts their ability to draft and deliver and deliberate in order to produce awards within a reasonable period of time. That is another systemic issue which we think has an impact on costs.”

THAILAND – on the relevance of costs during arbitration and enforcement: “Thailand is of the view that time and cost consideration is not only the issue in the arbitration process but also in the enforcement phase. In the case where a state decides to seek for setting aside or annulment of an arbitral award, we should resolve in favour of foreign investors. These costs take more time and resources for them. In some cases it take longer time in enforcement battle than arbitration itself.”

CHILE – on facts versus perceptions on the issue of costs: “It is very important for this group to carry out work based on facts and not perceptions. When we talk about cost and duration, I would like to ask what is a comparator that we are actually using. Are we comparing it to international adjudication processes in general or to a specific country domestic proceeding? We need to work on actual facts and not perceptions. We should first of all establish a comparator, set facts and statistics and assess if this is an issue of perceptions or not.”

PAKISTAN – on duration and the need for comparators: “the issue of duration has to be seen in the relative context of how well other multilateral institutions are performing.”

UNITED KINGDOM – on the issue of costs: “On the one hand costs of proceedings may help to deter frivolous claims and encourage mediation and early settlement of disputes. […] But the difficulties for states in defending expensive claims and for SMEs that are left without remedy are serious concerns worth considering.”

ITALY – on the sustainability and accessibility of ISDS for small and medium companies: Italy referred to the “systemic issue” that “small companies do not use the mechanism. But even for medium sized companies, sometimes, it is extremely difficult to access the system because of cost.”

CHINA – on delay and costs due to language barriers: “The current arbitration proceedings are carried out in some specific languages and most arbitrators use several specific languages or come from certain specific backgrounds, they may lack the relevant knowledge about the legal cultures of other countries. So for many developing countries including China, currently, we are facing difficulties related to language in terms of translation of our documents and this may also cause some extra delay and extra costs.”

SOUTH AFRICA – on costs of arbitration and equal access to justice: “There is no limit as to the costs nor the duration of the case which can last for several years and in which legal fees often amount to millions. The number of ISDS cases has increased greatly over the past years which means more use of public budgets. Furthermore, states where citizens cannot initiate ISDS disputes if an investor has failed to act responsibly or lawfully. Additionally only a foreign investor can initiate ISDS disputes if an investor’s actions fail to respect laws and standards, they can only be tried in the domestic court. Domestic investors cannot initiate an ISDS is a privilege for foreign investors only which raises the question of equal access to justice. Often SME enterprises cannot initiate ISDS disputes. In theory we can say they can. However because of the huge legal fees that are involved they cannot really use the system. Few of them can afford the costs. ISDS is first and foremost the system for the most powerful.”

SPAIN – on costs and parallel or drawn out proceedings: Spain suggested that parallel proceedings lead to a “significant issue of costs.” Suggested to avoid guerilla tactics through greater use of consolidation. Spain added that “the absence of clear rules of procedure lead to a situation whereby proceedings are interminable.”

EUROPEAN UNION – on the link between lack of consistency and cost: “This lack of consistency brings significant cost. This is problematic because there is a lack of predictability when analyzing the potential legislative or regulatory activities. This also engenders disputes because it is very often the case that one or the other party in a potential dispute can point to at least one instance in which an interpretation that suits them has been adopted and therefore they are tempted to seek to bring a case when it might not be necessary. In our view, there are differences [among the treaties], but these differences should not be exaggerated. Many countries in the world have negotiated investment treaties on the basis of models and there is a high degree of similarity. Virtually all of these treaties have key core obligations – obligations that we’re all familiar with: the non-discrimination obligations, the expropriation obligations, fair and equal treatment and types of obligations.”

SPAIN – on the costs that arise from inconsistency: Emphasized that “there are clear costs” to inconsistency and that “this inconsistency whether we call it incoherence or lack of predictability essentially means a lack of juridical or legal certainty. And this means then a risk premium for investors. And it means ceteris paribus, less investment, less employment and lower degree of welfare, well-being.”

Transparency

PAKISTAN – on transparency and appointment of arbitrators and annulment committee members: “One concern that springs to mind in relation to transparency is the manner in which arbitrators are chosen and members of the annulment committee. What precise criteria is applied in the selection of the arbitrators and members of the committee.”

ARGENTINA – on the need for procedural transparency including as to how institutions appoint arbitrators: “We think transparency should also guarantee the development of the arbitral proceedings and guarantee due process and the right to defend oneself and the right to legal equity in the search for justice. This should be an integral part of this but, when we talk about this type of transparency, what are we also getting at? Well, firstly, just how arbitral tribunal is actually acting, conveying information? How do these institutions act which administer the cases in appointing arbitrators?”

AUSTRALIA – on transparency and social license for ISDS: “Australia has been a very strong supporter of transparency in international dispute settlement including investor state dispute settlement. I think it links to the point I made earlier in relation to securing an adequate social license for ISDS and underscoring the legitimacy of that mechanism. Australia has taken various steps to enhance transparency in its bilateral investment treaties and the investment chapters of its FTAs and we very much welcome the convention as a model for transparency in ISDS.”

CHINA – on perceptions versus facts with regards to transparency: “Transparency is a relatively independent issue. We are of the view that if the working group needs to decide whether we need further work in terms of transparency. We believe that this decision should be based upon facts rather than simply perceptions or theories. As a result, we believe that it is necessary to recall relevant work carried out by international organizations to improve transparency in recent years and that the actual effect of these work including whether these work are satisfactory and can meet our expectation. Whether they’re going to have other implications for example implications upon ISDS duration and the costs.”

SWITZERLAND – on the legal framework for the implementation of transparency: “The legal framework to implement transparency is here and we have achieved that. So we should be happy about that. Practically all the new treaties have references to the transparency rules. So that is … quite a success for the works of this Commission. What might be missing still and because the picture is not entirely satisfactory at this stage is the implementation of the existing legal framework, the signature and the ratification of the Mauritius Convention on the one hand, but also the consent of disputing parties to transparency where transparency does not apply under the relevant BIT. There should be increased awareness also of tribunals. Tribunals should probably propose to use transparency rules, without imposing it of course, but making a proposal to the parties. Institutions could also promote the use of transparency rules within their proceedings.”

USA – on the relevance of facts versus perceptions: “The facts are yet to be determined about [the UNCITRAL transparency rules]. But again we think the question of what is the role of transparency in ISDS reform is critical. And it goes to a larger conversation that we’ve had today about the relationship between facts and perceptions and in our view it’s critical. Transparency has been critical in the sense that it is very challenging as a state to challenge some negative perceptions of some treaties or existing rules when we’re acting against a foundation of a lack of transparency.”

USA – on the relevance of transparency: “Many of the cases that have attracted the most scrutiny and most criticism by stakeholders in the United States have been cases that have been entirely lacking in transparency and so there have been essentially no facts to use to offer as a counter narrative to this negative perception or to concerns about process. And so in our practice again in this greater discussion about the relative importance of facts and perceptions we think they’re linked and we think that having greater transparency is a critical tool to address concerns that can evolve into negative perceptions about ISDS.”

USA – on transparency versus the lack of disclosure: “Many countries declined to make essentially any information public even when it is entirely permitted under the relevant arbitral rules and the relevant convention. And so in thinking about the extent that transparency is a problem that needs to be addressed I think we do need to look at state practice and each state should assess to the extent they value and prioritize transparency, what steps can they do now to enhance transparency with respect to their existing agreements, separate and apart from the UNCITRAL transparency rules and Convention.”

NETHERLANDS – on the Mauritius Convention and the resolution of transparency concerns via multilateral negotiations: “The Kingdom of the Netherlands is in favor of transparent procedures. The lack of transparency and openness are important concerns. The lack thereof namely has serious consequences for the legitimacy of our regime. That is why the Mauritius Convention has to be negotiated within UNCITRAL, to which by the way we are signatory. The Mauritius Convention is an excellent instrument to improve transparency and thus improve the legitimacy of the system. And the convention is also an excellent example that concerns related to ISDS can be solved via multilateral negotiations despite the differences between our bilateral treaties and the different procedural rules in place.”

NETHERLANDS – on transparency and the need for a systemic holistic approach: “The issue of transparency is really a crosscutting one and this is also indicated by the interventions of several other delegations highlighting possible further issues that can be addressed such as the one of third party funding. As we have seen in the previous discussions and our concerns are also crosscutting which ask and in view of this delegation for a systemic holistic approach.”

MAURITIUS – on the role of arbitrators in enforcing transparency: “Now that we’ve seen a shift of paradigm with the transparency rules and it’s getting more and more accepted it may be that the time has come to encourage tribunals to grapple themselves with the issue even in the absence of party consent. We would we respectfully agree with those delegations that have said that transparency is a very important part of the solution and we would therefore encourage those delegations to ratify the Mauritius Convention.”

SINGAPORE – on transparency and third party funding and institutional appointment of arbitrators: echoed the suggestions made by several delegations and stressed “the issue of transparency and disclosure in third party funding” and “the issue of transparency in the appointment of presiding arbitrators and tribunals by appointing authorities.”

CHILE – on the transparency problem being one of lack of implementation: “I heard a number of delegations today saying that we had done the work already. We had the convention and it was quite surprising considering that many of those countries haven’t ratified or signed the convention or have implemented them in their in their agreement. Which leads me to think that the problem is not that we haven’t identified the problems we haven’t identified the solutions but the problem is we’re not implementing them. So maybe we should focus on how to actually implement the core elements of the Mauritius convention even if some countries have some problems ratifying it.”

CHILE – on the transparency and the problem of public perceptions: “The problem is that even though we are transparent and we disclose everything, the public is not understanding it. There is a problem of actually understanding because these are legal documents. These are very large and extensive and of course big law firms can understand them and can actually make summaries. But maybe we should be doing more about that. That’s when the problems of perceptions come in.”

Third party funding

ISRAEL – on third party funding and transparency: “We believe that the issue of third party funding raises issues of transparency that should be discussed on our work.”

POLAND – on the relationship between third party funding and frivolous claims: “Many proceedings are funded by third parties. Under the current substantive and procedural rules, the third party funder runs a low risk of indemnifying the whole state for the incurred costs of arbitration. Such situation creates an obvious asymmetry between the investor and the state and can induce investors to raise unrelated claims.”

SINGAPORE – on the issue of third party funding: the issue of third party funding “is not just related to cost per se but actually has a much broader implication on other aspects of ISDS as well including on things like the independence of arbitrators and conflicts of interest.” Singapore believes that “the increasing prevalence of third party funding in arbitration cases these days is something that is not being sufficiently addressed in the current ISDS framework but it needs to be more fully addressed in order to safeguard the integrity and impartiality of ISDS proceedings.”

AUSTRALIA – on transparency and third party funding: “one of the areas to look at concerning ways of improving transparency is in relation to third party funding.”

ITALY – on systemic issues re costs, third party funding and legitimacy: “some issues on security for costs, of third party financing are also linked to the legitimacy of the system because transparency and conflicts are connected.” Those issues should be seen as “linked together for helping investors to find the right mechanism to get what they want and not only on the side of the state.”

NETHERLANDS – on transparency and the need for a systemic holistic approach: “The issue of transparency is really a crosscutting one and this is also indicated by the interventions of several other delegations highlighting possible further issues that can be addressed such as the one of third party funding. As we have seen in the previous discussions and our concerns are also crosscutting which ask and in view of this delegation for a systemic holistic approach.”

SINGAPORE – on transparency and third party funding and institutional appointment of arbitrators: echoed the suggestions made by several delegations and stressed “the issue of transparency and disclosure in third party funding” and “the issue of transparency in the appointment of presiding arbitrators and tribunals by appointing authorities.”

INDIA – on the problem of pro-investor and pro-state arbitrators for impartiality and independence: “The very fact that there are investors’ arbitrators and there are states’ arbitrators is a testimony that impartiality and independence is lacking in the system. The system is lacking in adequate ethical requirements. And there’s a lot of conflict of interest in this system which needs to be corrected. Third party funding is a problem as well. The mix of third party funding, multiple hatting and lack of adequate ethical standards has the potential to derail the system.”

NIGERIA – on the problem of third party funding: “We noted the argument that third party funding will provide access to justice for SMEs who may lack funds. Essentially, in our experience, we find that third party funders are attracted by the high level claims, the perceived finality of awards, and the enforcement regime. But it still raises a moral, ethical, policy issues. Why a total stranger who has suffered no injury should be allowed to benefit from the injury caused to others. In our view the danger of the third party funding is that funders are not known to BITs. It poses real challenges including the possibility of encouraging unmeritorious claims, the possibility of discouraging settlement and the risk that the funders may put their own interests ahead of that of the claimant. Going forward we are of the view that the secretariat could consider how we could tackle these third party funding challenges either by way of enhanced transparency or outright ban.”

CANADA – on third party funding and perceptions: “The link to the discussion of third party funding is very much because of the perception that third party funding really benefits not legitimate investors, that it is a way of exploiting the system and that it does give rise to claims that would not otherwise justifiably arise. That being said, there is growing consensus and a number of recent treaties look at the issue of transparency as well as security for cost and the link to third party funding.”

URUGUAY – on transparency, impartiality of the arbitrators and third party funding: “Transparency of the proceedings is vital. We would suggest the idea that there be a proper phase in arbitration whereby a group or committee would analyze the relevance the documents brought forward as evidence, look at the claim and then consider costs. This could also look at the list of arbitrators in order to ascertain the skills, the professional ethics and their links with the parties or third party funders in order to avoid conflicts of interest. The investor is looking at his particular interests and the state is looking at the public interest and the arbitrators therefore need to be aware of this and be better involved to a greater degree in the cases, that the awards affect the public interest or are certainly involved with it. So we need to have impartiality which means that without prejudice to the private aspects of the dispute, the public impact of the award has to be considered and the effects thereof. One solution could be to have in all treaties something on the process for dispute resolution looking at arbitrators, the process of resolution and the entire proceedings.”

USA – onthe need to better understand different types of third party funding: “We too acknowledge that third party funding is playing an increasing role in the conduct of investment arbitration and share the view that its role needs to be better understood in the context of ISDS. But we also note that third party funding can encompass a number of different forms as the delegate from El Salvador noted – there are contingency fees and that can be one form of third party funding. And others have noted that it plays an important role for access to justice for small and medium enterprises. Given these different forms, it’s important to have more information and a better inventory of these types of different forms available to the working group so that we can not only understand how third party funding is being used but that we can define it in order to be in a better position to assess what solutions may be appropriate for what types of third party funding may raise concerns.”

Counterclaims

ARGENTINA – on the issue of counterclaims: Argentina started by saying it is “in favor of counterclaims and the possibility to establish a mechanism for a counter-claim.” It then noted that there are many drawbacks to the use of counterclaims and noted that “there is no substantive basis on which states can base themselves. The old generational conventions conclude rights for investors and duties for states. But even if we look at the more recent treaties, the so-called third generation conventions, we can see that the rights which have been incorporated in favor of states, it has been recognized that the states can try and re-establish a balance. This is the situation the state faces when thinking about a possible counterclaim. We are not so much aware of specifically drafted obligations incumbent on investors. So we think it’s difficult for such a counterclaim from a state to prosper. Now if we go to other sources of jurisdiction we look at certain contracts there, the state could perhaps invoke certain obligations incumbent on the investor because that’s the basis of such counterclaims but we do think this is rather complicated. That is if we’re going to incorporate other instruments apart from the treaty as applicable law it would mean that each state would have to decide.”

KOREA – on the issue of counterclaims: “With respect to counterclaims we believe that the counterclaim should be permitted only if there is a specific obligation in a specific instrument at issue. Perhaps some ISDS dispute, the way a contract is an issue through the umbrella close where the counterclaim could be natural or could be reasonable. But in other instances, we should be careful in discussing counter-claim even though counterclaim itself is an important tool for the responding host government.”

SOUTH AFRICA – on the benefits of counterclaims “We believe that it’s an issue that could bring rebalance into the system. And additionally I think in terms of benefits it may contribute towards procedural fairness and legitimacy and enhancement of the rule of law. It may actually also contribute to some of the concerns that we’ve raised in terms of probably discouraging frivolous claims and it may also have an effect on third party funding decisions as funders would have to assess the likelihood of affirmative liability in addition to the likelihood of success on the merits in the case against the opposing party.”

GERMANY – on the issue of counterclaims: “Counterclaims very often are subject to local laws or domestic laws and in investment arbitration the usual applicable law is public international law and investment treaty rules. So we have to consider whether it’s actually appropriate and possible for a tribunal to substantially look into claims that are either based on domestic public law or domestic private law, and whether arbitrators or judges have the competence to do so and if it can be assured that their rulings will then also be enforceable in the domestic legal systems accordingly and there will not be any conference towards national jurisdiction.”

CANADA – on the drawbacks of counterclaims: “There have been issues that are good examples that raise concerns and questions about why do investors have privileged access to investor-state dispute settlement where the state is not capable of enforcing for example environmental obligations or ensuring payment of taxes and so on. However, bringing everything into the ISDS system – whether it be an investment tribunal, multilateral investment tribunal or ad hoc tribunals – has the potential of raising even more concerns about the legitimacy of the system and taking away from domestic courts which may be much better placed to deal with domestic law issues and concerns.”

In addition, Section 232 of the Trade Expansion Act of 1962 and its associated regulations appear to be "as such" inconsistent with Articles I:1 and II:1 of the GATT 1994 and does not appear to be justifiable under Article XXI:(b) of the GATT 1994 because they require the United States to account for economic welfare and other factors that are not necessary for the protection of its essential security interests, in a manner that is inconsistent with Article XVI:4 of the WTO Agreement.

Canada says that Section 232 "requires" the United States "to account for economic welfare and other factors that are not necessary for the protection of its essential security interests." Let's look at the statute:

(d) Domestic production for national defense; impact of foreign competition on economic welfare of domestic industries

For the purposes of this section, the Secretary and the President shall, in the light of the requirements of national security and without excluding other relevant factors, give consideration to domestic production needed for projected national defense requirements, the capacity of domestic industries to meet such requirements, existing and anticipated availabilities of the human resources, products, raw materials, and other supplies and services essential to the national defense, the requirements of growth of such industries and such supplies and services including the investment, exploration, and development necessary to assure such growth, and the importation of goods in terms of their quantities, availabilities, character, and use as those affect such industries and the capacity of the United States to meet national security requirements. In the administration of this section, the Secretary and the President shall further recognize the close relation of the economic welfare of the Nation to our national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports shall be considered, without excluding other factors, in determining whether such weakening of our internal economy may impair the national security.

I think Canada is right about what the Section 232 statute requires ("shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries"). But is that unjustifiable under Article XXI:(b)? Perhaps it depends on how the Commerce Department and the President use their discretion under the statute. If the statute were applied only to products that were closely related to national security (e.g., fighter jets and hand grenades), then the economic welfare language might make sense. I can understand why governments would want to make sure that domestic industries supplying crucial military goods existed. Arguably, then, the Commerce Department and the President have the discretion under the statute to apply it in a way that is consistent with GATT Article XXI, simply by focusing on goods that closely relate to security. While there is a strong argument that the recent application of Section 232 has not been consistent with Article XXI, the discretion to apply it consistently is still there.

As explained in a previous post, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions on states’ concerns about investor-state dispute settlement. To facilitate discussions about the desirability of reforms and their potential nature, we have organized these quotes into key themes that emerged during the meetings. This blog sets out quotes about arbitral appointments, incentives and legitimacy. The other blogs deal with concerns about:

We avoid editorializing because we think that it is important for other stakeholders to hear states’ concerns expressed in their own words. We have grouped states’ concerns under headings but otherwise have kept the interventions on each sub-topic in the order in which they were made. For an analytical framework for understanding these reform dynamics, see Anthea Roberts, Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration, 112 AJIL _ (2018) (forthcoming).

General observations: the lack of independence and impartiality of adjudicators

INDIA – on the problem of pro-investor and pro-state arbitrators for impartiality and independence: “The very fact that there are investors arbitrators and there are states arbitrators is a testimony that impartiality and independence is lacking in the system. The system is lacking in adequate ethical requirements. And there’s a lot of conflict of interest in this system which needs to be corrected. Third party funding is a problem as well. The mix of third party funding, multiple hatting and lack of adequate ethical standards has the potential to derail the system.”

AUSTRALIA – on the relevance of perception regarding the lack of sufficient guarantees of independence and impartiality of individual arbitrators: “does consider that both real and perceived problems with arbitrator independence, neutrality and accountability must be considered particularly as governments are accountable to the public and we do consider the perceptions to be relevant in this regard. And on that it’s true that there does seem to be a perception at least that arbitrators are at least partially motivated by a desire to be appointed or reappointed by the states or the investors and a perception that there are divisions between state-friendly and investor-friendly arbitrators.”

CANADA – on perceptions of bias and the problem of needing balance for permanent tribunals: “We need to look at numbers and facts and we can’t necessarily conclude from those numbers that there is bias. It could be that certain arbitrators have certain views about investment law – that may be a broader interpretation of the FET standard – and this is really not very different from domestic courts. If we look at Supreme Courts in many of our countries, our judges are identified with certain views and we can’t deny that. So what is the difference? The difference really comes back to this idea that arbitrators benefit from the views that they express and they have an interest in being reappointed and that the remuneration in some way influences the procedure, for example that they have no incentive to reject frivolous claims and that it may also influence the outcome. And so we are dealing very much with a perception problem perhaps more so than a true bias. And I say that while being very mindful of the challenges that any alternatives to the current system. The challenges that would be tied to for example developing a permanent tribunal, including difficulties in composition of a balanced tribunal that need representativeness and other criteria. I think Professor Brower, the USCIB, risks of politicization of such a system are real.”

SUDAN – on insufficient standards to guarantee the independence and impartiality of arbitrators: “Despite the efforts being made to update the standards of conduct for arbitrators, there is still a challenge before us. There are not enough guarantees to ensure the independence of arbitrators completely. First of all the arbitrators must preserve their integrity and the fairness of the arbitration tribunals. If there are allegations against the arbitrators’ work or their lack of independence, these doubts must be cleared. Standards of behavior must also be put into place for communication with the parties. The arbitrator must also manage the process in a fair equitable fashion. When decisions are taken the arbitrator must be fair and must ensure that fairness is guaranteed. Arbitrators should also respect the confidentiality rules and standards. The arbitrator must also make sure that the parties recover their costs and that their fees are covered. Regarding judges, magistrates and courts the costs and practices are known to all. Can we have this same kind of standards and agreements with the arbitrators? As for the arbitration centers, either on an institutional or an individual level can the standards be guaranteed? These are the questions that we must seek answers to. Independently of UNCITRAL’s rules, we need an agreement which is part of the convention regulating standards of conduct and the ethics of arbitrators.”

ECUADOR – on the inherent partiality of ad hoc appointments: “If an arbitrator is appointed by a state or if an arbitrator is appointed by an investor when the investor appoints the arbitrator they will look into their background to see that this arbitrator has not already worked or may reach decisions that favor states. The same thing goes for states. So how can we talk about impartiality if the way in which arbitrators are appointed is already based on a search for partiality. This quest for partiality has an impact on arbitrators as well so much so that there are arbitrators catalogued or classified as state friendly and others who are classified as investor friendly.”

ROMANIA – on the importance of perceptions about impartiality and the possible establishment of a court: “In our view the parties’ perception of the system is a key element for well-functioning. The distinguished delegate of the US has noted this morning that perceptions of the parties relating to the impartiality of the arbitrators or rather the lack thereof do not necessarily reflect the reality in each individual case. However in this delegation’s opinion, even the recurrence of instances where there is a mere perception of a lack of impartiality which does not necessarily correspond to reality is sufficient to undermine the legitimacy of the system. As it is generally acknowledged, perceptions of fairness of adjudication systems are capable of promoting better compliance, cooperation and deference even in the face of unfavorable decisions. It is this delegation’s submission that the perception of a lack of impartiality in the system and ultimately of a lack of fairness affects its overall efficiency. Should this working group reach the conclusion under its mandate that reform is indeed needed, and we believe it is, then the reform should address these concerns in order to ensure neutrality and impartiality of adjudicators in ISDS procedures. In this sense, a potential sensible approach would be in our view the creation of a judicial body which would guarantee neutrality similar to other fora dealing with international disputes and whose overall impartiality and independence is generally not questioned.”

Process of selection of adjudicators and lack of diversity

COLOMBIA – on lack of diversity in arbitral appointments: “We would like to report a series of figures, of statistical data that were compiled from different sources. The delegate of Mauritius has already told us that the idea that there were state arbitrators and perhaps pro-party appointed arbitrators existed, and this in itself already is striking. It makes it possible to understand that there’s a deep seated problem that might arise in the characteristics of the adjudicators in these particular cases. However, there is cause for greater concern when we look at the statistics in particular of the 372 individuals appointed to ICSID tribunals since 1972 until 2011. Of these, 37 were appointed to around 50% of the cases. In other words, 10% of these people were appointed in 50% of the cases handled by ICSID over a time period of close to 40 years. Of these ICSID-appointed arbitrators, one third (something like 33 %) are from only five universities: Cambridge, Harvard, Oxford, Stanford and Yale. 47% of the arbitrators are nationals of Western European countries and 22% of them are citizens of North American countries. Almost 100% of the arbitrators come from these two geographical regions. 93% of the arbitrators are men. Only 7% are women. Of these 7%, two thirds are just two people, two women. We were also told at one point that 84% of the arbitrators are party-appointed, to bring to light the fact that the parties are the cause of the situation. And going back to the comment on the delegate of Mauritius regarding the fact that there are arbitrators seen as either state arbitrators or investor arbitrators, we see that in 95% of cases when the decision is made in favor of one of the parties, the arbitrator named by the other gets a vote that breaks the tie. It does not appear to this delegation that the situation we have just described is a normal one. We don’t think that it is an acceptable one either. If we simply look at the immense and wonderful diversity represented here in this conference room, we can see that the universe from which the arbitrators are being selected does not appear to be representative.”

UNITED KINGDOM – on the need to clarify the role of party-appointed arbitrators: “Party appointment is an issue that goes to the very heart of investor-state dispute settlement and there is unsurprisingly a broad range of views as to the benefits and drawbacks of this approach to arbitrator appointments. Our concern is that there is currently no job description for party-appointed arbitrators. The lack of guidance for party appointed arbitrators as to what their role in the tribunal is meant to be has the potential to create an imbalance between parties and inconsistency amongst tribunals. While some arbitrators may see their party of appointment as no different from being appointed chair, in that they must be completely neutral, others may distinguish the special nature of their appointment. They perhaps approach their role in an analogous way to ad hoc judges in the International Court of Justice, seeing themselves as having a duty to ensure that their party’s views are heard and understood by the rest of the tribunal. We think that clarity is therefore needed as to what is expected from a party appointed arbitrator.”

EUROPEAN UNION – on the ability of governments to select neutral adjudicators for international courts: “When governments or international institutions can appoint adjudicators in a more long term perspective, then they will have to appoint those adjudicators that best respect the balance of interest that has been struck during the negotiations of the substantive rules of the underlying treaties, meaning adjudicators that are neutral and respect the treaty as it stands and not be in favor of one or a particular party. We need to overcome the idea that governments would be incapable of selecting neutral and independent adjudicators.”

BAHRAIN – on the problem of repeat appointments, pro-investor and pro-state appointments and the need for arbitral institutions to play a greater role in appointments: “The appointment system of arbitrators no doubt has a number of imperfections. It’s undeniable that some arbitrators are qualified as pro-investors, and some others are pro-state. These classifications are sometimes hasty though. They could be misleading and might not be realistic. I support the proposal to allow arbitral institutions to play a greater role in the selection of arbitrators. In terms of those arbitrators who are repeatedly appointed, I think that the institutions can issue some guidelines, the goal of which would be to prevent the same individuals from being appointed arbitrator beyond a certain number of times for a certain period.”

ARGENTINA – on the need for more transparency in the arbitral appointment process: “We wanted to highlight the lack of transparency in some appointments, and this problem is related to a lack of information about the appointment and selection process, as well as limited accountability at least in the public eye. The process of appointing arbitrators should be conducted in a transparent fashion with more information about potential candidates, with more consultation of the parties, with published selection criteria and with an explanation of the decisions taken. And we believe that this is aggravated when it comes to the discussion of background. There is also an issue of lack of transparency in appointments made through appointing authorities. Among other aspects that are problematic are the costs associated to the appointment of arbitrators. In light of the inconsistent decisions, you need to conduct a background check of each one of them in order to know what their views are and this is a more systemic problem we’re facing. Also the search for people who’ve already participated in the system leads to a recurrent appointment of a limited number of arbitrators, and they are not sufficiently gender or geographically representative although this already has been amply stated by several of the previous speakers. Other problems with the current ad hoc appointment of arbitrators means that the same people act as counsel and as arbitrators in different cases. The wish of arbitrators to be appointed and third party financing also condition the impartiality of arbitrators. These must be complemented with a clear simplified efficient system to recuse arbitrators with a standard of conduct which should be applied if their removal is required. These measures could be complemented with the establishment of a single code of ethics for all arbitrators by establishing a continued duty to report by arbitrators about their positions, their work and other circumstances that either directly or indirectly could impact dispute settlement as well as standards that limit the activities that arbitrators are permitted to conduct. The lack of standards lead to difficulties in the work of arbitrators and it is therefore necessary to harmonize ethical codes, promote a clear code of conduct of the members of an arbitration tribunal in order to check whether their actions have been impartial and independent.”

INDONESIA – on the need for greater representation of developing states in arbitral appointments: “The number of arbitrators appointed from low level of income is still very low. The majority of them are coming from Western Europe and America which is approximately 69% percent of the numbers even though 83 percent of cases are filed against developing countries. My delegation is of the view that our consideration on the issues of arbitrators, in order to make the arbitrators more cognizant of public interest, we may also address the representation of developing countries’ arbitrators as well as the knowledge of arbitrators on host country domestic laws and policy regulation in investment.”

AUSTRALIA – on the importance of gender and regional diversity and the need to balance this against the need for expertise and experience: “We definitely have noted the limited diversity among the frequently appointed arbitrators and we support the goal of seeking more balanced gender and regional representation of arbitrators. And we know that there is some work going on in that regard already amongst some of the institutions. Having said that I do think we do consider that it’s important there be an appropriate balance between encouraging new entrants and ensuring that parties have confidence in the expertise and the experience of the new entrants.”

CHINA – on the fundamental difference between commercial and investment arbitration and its impact on the appointment of arbitrators: “In our view, the fundamental difference between investment and commercial arbitration is not really the facts. The difference really resides in the fact that investment arbitration deals with the government. Commercial arbitration only concerns the protection of private rights. Investment Treaties are different from commercial contracts all of the provisions have different applications, different responsibilities that must be assumed by the governments. In one case, the investors are looking at rights. So in this context, the interests of the host country in the case of litigation must be respected and protected. As a result, our opinion is that investment arbitration is very particular in nature and it requires that arbitrators be appointed who have a background in public international law or legal knowledge regarding investment treaties. We need to appoint arbitrators who have international public law backgrounds or treaty knowledge, investment treaty knowledge. It doesn’t mean that we need pro-government arbitrator because China itself is a large country investing abroad. And so the business investments of China abroad must also be protected. What the arbitration tribunal must do first of all is to ensure independence and impartiality. And secondly, it must protect the legitimate rights and interests of investors in strict compliance with treaties during recent negotiations on investment treaties to resolve this type of problem.”

CANADA – on state appointments contributing to the small number of arbitrators who are deciding disputes: “Perhaps the states who choose these arbitrators and may pick the same arbitrators over and over again have some responsibility in the numbers that we are seeing in the repeat appointments. The arbitral institutions like the PCA and ICSID have over the last few years made an effort in coming up with new names and more diversity when they are making their own appointments.”

USA – on state appointments contributing to the small number of arbitrators who are deciding disputes: “States share some of the responsibility for the limited pool of arbitrators and agree that this is a problem that the states can take the first steps through their own practice.”

POLAND – on lack of diversity in arbitral appointments: “Firstly, the pool of arbitrators is relatively narrow and tends to change slowly. Secondly there is a significant number of arbitrators who are appointed almost exclusively either by investors or by states. This results in the common perception that arbitrators are less impartial than adjudicators in other legal systems. Thirdly, the pool of arbitrators is relatively homogenous when it comes to regions of origin, education, professional experience and gender. There should be no doubt that the lack of diversity affects the legitimacy of the ISDS system. In the opinion of this delegation, the lack of geographical diversity among arbitrators is particularly troubling. Many regions of the world are not represented or are heavily under-represented in arbitrators’ community. This lack of diversity concerns us not only from my perspective over the legitimacy of the system but because it may affect the correctness of the awards. Not only actual bias of Arbitrators but also perceived bias are a serious threat to the legitimacy.”

USA – on transparency in the selection of arbitrators: “With respect to party-appointed arbitrators, there needs to be a balance in the question of transparency in that process and the need to have certain amount of discretion for states and claimants to assess candidates. But even there we also think that at least from the state perspective it may be possible for states to consider making available general criteria that they use to identify candidates. We would also note and want to emphasize that as perceptions of concerns about transparency have arisen, that the arbitral institutions have been moving in a positive and general direction to improve transparency by explaining their processes for selection as well as making available more information about who is sitting as an arbitrator and civil society groups have also contributed to this process by further distributing this information and also making available for appropriate CVs of who the arbitrators are. And as awards become more available we also become more familiar with who is sitting as arbitrators and what their views are. We think that these steps towards transparency more generally will help further transparency in the process of selection of arbitrators as well. We recognize however that some of these issues are still viewed as being somewhat opaque but we welcome the trend towards moving towards greater publication of this information and dissemination of it as well.”

CHINA – on the need to select arbitrators with the appropriate background to interpret international investment treaties: “When we negotiate the letter of the agreements, I will listen to the opinions of the government. I would also listen to the opinions of the private investors. And therefore, I agree with this viewpoint that is every letter of the convention of the law should fully reflect the policies of the government and the consideration of protecting the private investors. And now we go back to how should we select arbitrators. Just now, observer from EFILA mentioned that the government can select people who have background of international law to be arbitrators. However, in practice, investors would often select individuals who are in commercial arbitration to be their arbitrators. Another point: a very important person is the chief arbitrator. We do not have any special arrangements here. Whether this chief arbitrator should have a background of international law, we are not very clear on this. I believe people who are present here who participate in negotiations will agree to this viewpoint that is when we come to arbitrations, they do not want to see the court to make a decision which contravenes the original intent. Yesterday I mentioned if an individual in commercial arbitration, he may not understand the policies of the government and the way the government conducts their business and their public interests. Therefore I believe we do have this kind of risks. It might be that the majority of the arbitrators do not know the considerations of the government and they do not know the policy background behind the letters. Therefore I think the backgrounds of the arbitrators are a very important element to be considered. Through this working group, we need to find a good, appropriate solution.”

Double hatting and the credibility of the regime

TURKEY – on double hatting affecting the credibility of the system: “The appointment of a very limited number of individuals, the same individuals serving as arbitrators in one case and as a counsel in another case and the emergence of the third party funding because of high fees of arbitrators are the most important ones that damage the credibility of both the arbitrators and the current ISDS system. Independence and impartiality of the arbitrators are very important. . Arbitrators must be impartial and independent and shouldn’t represent any party. it’s evident that we need a new procedure for the selection of the arbitrators and discuss how to adopt some compulsory code of conduct for the arbitrators.”

PHILIPPINES – on double hatting and a code of conduct for arbitrators: “The Philippines does share the concern that systemic issues should be addressed with respect to the lack of a uniform and enforceable code of ethics for arbitrators in investment disputes. And such concern involves instances where the same set of arbitrators act as counsel or experts in different arbitrations, against a fine set of respondent states. The issue of multiple roles of arbitrators should indeed be addressed for the obvious reason that an arbitrator should not only be independent but must also be perceived as independent for his awards to be legitimate and credible before the eyes of the state party and its constituency to whom a state party is accountable. In most domestic jurisdictions, those who sit in judgment would not be allowed to engage in legal practice that could generate situations of conflict of interest or integrity issues. We wish to consider the expectation that this could be demanded of arbitrators who sit in judgment over matters that are vital to the economic and political life of sovereign states. The Philippines therefore looks upon this body to possibly formulate a potential agreed and binding code of conduct for investment arbitrators.”

BELGIUM – on the need to regulate double hatting: “The issue of ethics and independence and impartiality should be remedied within the framework of a broader, more fundamental reform. Regarding the issue of the double hatting, the delegation of Belgium observed that the current framework does not properly address this issue, in the sense of regulating this phenomenon in a clear and transparent way.”

USA – on the need to identify actual concerns about double hatting: “We recognize that the practice of double hatting can raise concerns about the appearance of impropriety in particular situations. We think it’s important for the working group to note however that we need to focus on what the problem actually is. For example we agree that it’s important to avoid instances where an individual is sitting both as an arbitrator in one case and counsel in another, and maybe appearing before that same arbitrator that he’s sitting with or she is sitting with. We do think though that it’s important to have a better understanding of the nature and extent of the double hatting to ensure that as we move forward in this process that we are addressing actual concerns because we are also seeing changes in the practice of practitioners themselves where we’re seeing counsel who want to be arbitrators leave their practices and establish themselves as sole arbitrators.”

EL SALVADOR – on double hatting being a serious issue and not about mere perceptions: “We believe that the fact that a member of one arbitration tribunal also acts as counsel in other cases is one of the major factors that has contributed to the problem of substance here. The underlying issue, that is of incorrect interpretation of the treaty, despite the fact that at this present juncture it is not the purpose of this working group to talk of the substance of arbitration in the international sphere. We do think that double hatting contributes to that problem of substance. So the additional contribution that we’d like to make is to the effect that we would say we don’t believe this to be only a problem of perception but a real and serious problem.”

BAHRAIN – on double hatting not being a sufficient concern to justify abandoning the current system: “The double hatting is raising very serious issues of bias and impropriety in investment arbitration. It is already very problematic in the field of commercial arbitration in some situations. It is even more serious in investment arbitration as the chances of encountering overlapping issues and fact patterns in such a field are even greater. I am not convinced however that the issue justifies abandoning the system of investment arbitration altogether. Solutions can be devised that would not jeopardize the quest for greater diversity in investment arbitration.”

Compensation of arbitrators, ethical rules and the question of a code of conduct

UNITED KINGDOM – on the need for uniform ethical standards: “On the issue of independence and impartiality, the UK delegation considers that ensuring clarity in ethical standards by arbitrators is vital. While arbitrators are often guided by ethical rules in domestic legislation, arbitration rules and voluntary guidelines, our concern is that there are no uniform ethical rules for arbitrations. And a great approach to things like the content and ethical standards disclosure of patients and dealing with conflicts between different ethical rules is especially important in the field of investor state arbitration because of the public nature of disputes, negative perceptions associated with the process and the fact that arbitrators and counsel in investment arbitration come from a vast array of legal traditions.”

UGANDA – on the need for a code of conduct for arbitrators and counsel: “There is a case to be made for the consideration of a code of conduct that applies equally to counsel.”

MOROCCO – on the rules governing the conduct of arbitrators: “Any reform cannot be successful and effective unless there is a reform of the rules relevant to the arbitrators, including their appointment. We believe that the rules for the appointment should not only be conditioned on competence and integrity but they should be fully cognizant of the concerns and trends of states and also should be knowledgeable of the new principles experienced by development on the world, w is which is adopted by states whether in the context of the UN or in the context of UN organizations, such as the principles relative to comprehensive development and sustainable development and protection of the environment and others. The arbitrators should also take into account in their verdicts these principles and these concerns.”

MOROCCO – on the compensation of arbitrators: “As regards the compensation of the arbitrators, we believe that there must be transparent and rational criteria, especially since such compensation burdens state budgets, especially poorer states. Sometimes these compensations provoke major criticism by the public opinion in those states. As regards the time for appointing, it must be reviewed and we believe this period is rather long, and hence must be reduced and the parties must think of finding arbitrators in a preemptive manner in the process of reconciliation. If the two parties are not successful in any reconciliation, they would have a preconceived idea about the arbitrators who would be chosen to make up the tribunals in order to reduce the term for the appointment of arbitration and to use the term of arbitration in general. As concerning the challenge of the arbitrators we believe that the current system is open throughout the period of arbitration which would prolong the term of arbitration. Arbitrators can be challenged at any time and take the arbitration to square one. Therefore we believe the term must be set during which the arbitrators can be challenged so it will not remain open. In any case, the term for challenging the arbitrators should not exceed the beginning of the work of the tribunal. One last point which is the final point in my intervention regarding the nationality of arbitrators. If the current system of international arbitration makes it a condition that the arbitrator or the chairman does not have the nationality of the other party there is ambiguity there vacuum regarding who has this capacity with these states hosting the investment. We believe that this question that is the status of the resident deserves further thinking and discussion because it also affects the integrity and objectivity of the arbitrators.”

A systemic issue

CHINA – on the need for systemic solutions to deal with the independence and impartiality of arbitrators: “We need an approach that is integral, comprehensive in order to systematically deal with the question of independence and impartiality of arbitrators. As a result to ensure the independence and impartiality of arbitrators is a systematic issue one which requires an integral approach in order to resolve the issues.”

CYPRUS – on the need for systemic reform: “Cyprus echoes the concerns expressed by many of the delegates during the proceedings regarding systematic issues with ISDS, including with respect to the arbitrator appointment process. These concerns include the appointment of repeat players, lack of diversity both in terms of region and gender diversity, and lack of transparency in the appointment process. Slight adjustments to the current arbitrator selection process will continue to be insufficient to address these issues fully. Indeed the parties could be at a disadvantage if they don’t appoint these same repeat players. Promoting increased impartiality and independence of arbitrators can be better achieved through systematic reform, while not compromising on the experience and reputation and competence of the adjudicators.”

GERMANY – on systemic reform being needed to increase diversity: “If you want to increase diversity in the judicial system responsible for settling investment disputes and you likewise want to fight the double hatting problem, then the only solution that you quite have is fundamental systematic reform and that is for the following reasons. If you increase the number of arbitrators or if you limit the number of cases an arbitrator can sit on, that means that this arbitrator has to look for different sources of income to pay for his livelihood. And that usually means, because they have to be experts in their fields, that they have to work as counsels or somewhere in the field of investment arbitration. Increasing diversity without reforming the system as such will increase the double hatting necessarily because otherwise you will not find any people that voluntarily would want to sit as arbitrators.”

SPAIN – on the inherent characteristics of the current system creating nefarious incentives and the need for a systemic response: “What is key here and this is evident from an economic point of view is a matter of incentives. The same person, if you give him incentives of one sort will function in one way and if he has incentives of another sort he’ll function in a different way. The problem facing us is that the existing mechanism, the existing incentives, inter alia compensation and fees. But that’s not the only incentive. I would like to emphasize the fact that the mechanism determining the conduct of those who have to take decisions is of vital importance and here it must be stated clearly that the current incentives current fees foster dependency and bias. It’s a matter of the remuneration. So I think here we are up against a systemic problem, a structural one. As clearly emerges from the documents submitted by the EU and as this is a systemic issue, we can’t improve it to just incrementally. For us, the matter of codes of conduct is identical to an incremental improvement. It’s necessary it’s there but it’s manifestly inadequate.”

SPAIN – on the inadequacy of establishing an appellate mechanism alone: “We do think it’s very important to underscore the economic factors analyzed in establishing any appellate mechanism. Establishing an appellate mechanism which would be juxtaposed on what we already have would be like having an elephant and an ant together. In economic terms, the transaction costs, the operating costs of the system would be vast and the system would fail to be efficient.”

CHILE – on the dangers of appointments being made by states only: “If you wish to completely change the system and allow states to have more power over the appointment such as through the establishment of roasters, we have to be mindful that one of the important features of biases today is the political neutrality of arbitral tribunals. Some of the views expressed in this room are dangerously approaching a preference for states to have more powers on the appointment of arbitrators. Of course the system that provides more attributions for the states in appointment will lead to less criticisms of certain stakeholders. But it is safe to say that it would just create new criticisms of other stakeholders such as investors who we should also take into account in considering several possible reforms to the system. We have to be extremely cautious of avoiding any risk of creating a negative impressions on the States as having exclusive prerogatives over the appointment system.”

PAKISTAN – on the need for systemic reform, not just increasing the pool of potential arbitrators: “Is it the smallness of number that is the cause of problem? I dare say not. It is the design of the system, the way the system is designed, the way arbitrators work, the culture that that design breeds that affects the ultimate outcome of proceedings. So yes by all means, smallness of pool and diversity is a desirable ambition that we should pursue with all the rigor we could muster. But at the same time, without addressing the key fundamental systemic concerns, without addressing the culture of the way the system works it would not affect the ultimate outcome by merely increasing the pool of arbitrators, by merely raising the number of arbitrators. And so I urge this House to consider the deeper systemic questions as we are then merely the cosmetic effect of increasing numbers.”

ECUADOR – on arbitration not producing depoliticization of disputes: “The dispute settlement system or investor state apparently, and I do say apparently because I don’t actually believe that this was the case, was created to depoliticize conflicts. But in reality, our experience forces us to draw the conclusion that there has been absolutely no depoliticization of anything or rather an additional problem has become attached to state-state relations.”

As explained in a previous post, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions on states’ concerns about investor-state dispute settlement. To facilitate discussions about the desirability of reforms and their potential nature, we have organized these quotes into key themes that emerged during the meetings. This blog sets out quotes about predictability, consistency and correctness. The other blogs deal with concerns about:

We avoid editorializing because we think that it is important for other stakeholders to hear states’ concerns expressed in their own words. We have grouped states’ concerns under headings but otherwise have kept the interventions on each sub-topic in the order in which they were made. For an analytical framework for understanding these reform dynamics, see Anthea Roberts, Incremental, Systemic, and Paradigmatic Reform of Investor-State Arbitration, 112 AJIL _ (2018) (forthcoming).

Inconsistency and lack of predictability:

EUROPEAN UNION – on the relationship between costs and consistency and predictability: “We think that the system has an effect of increasing those costs and hence by looking at the system we may be able to identify ways to gradually bring about reductions and these costs. We see this happening in three ways. The first way is because the system as it currently functions does not bring about predictability and does not bring about consistency. What does this mean. It means that in any given case before any freshly constituted ad hoc tribunal, a lawyer who is doing his or her job properly will make any possible argument that can be made legally in that particular situation. It doesn’t matter if that particular legal argument has been dismissed on multiple occasions by other tribunals. It may be the case that that particular ad hoc tribunal will accept the argumentation and so any diligent lawyer will have to make that argument again. So we think increasing and dealing with the issue of predictability and consistency will help address the issue of costs.”

CANADA – on consistency and predictability in outcomes: “The issue of coherence and consistency and predictability goes to the very heart of the reasons why we are here gathered to discuss reform of the system. This is certainly one of the key concern that we have heard from civil society, that we as a government also feel are issues that need to be addressed. It is critical that governments know where they stand when it comes to how those treaties will be interpreted. Obviously, ideally, consistently with the intention of the parties to the treaty and maybe that’s another issue which would which we can address. We should have a better idea as government advisers of how investment tribunals will interpret the obligation in one treaty. Obviously if the treaty language is different as you’ve noted that’s another issue. But there are instances where it has not been the case, where the same treaty language has been interpreted differently and that is something that needs to be addressed.”

SPAIN – on abuse of proceedings and misuse of structures and the need for a multilateral solution: Spain referred to “the issue of abuse of proceedings and misuse of structures or the use of fund shopping or shell companies for abusive claims. We think that this issue is profoundly linked to the overall benefits of the system. We’ve seen such groups of companies being formed in third countries by domestic investors, the only goal being from that to be able to bring claims against the state by abusing an instrument conceived initially and exclusively for foreign investors. It is essential that these procedural issues be addressed in a multilateral context because they are intimately linked to the legitimacy of the whole system. And we should think and analyze multilateral instruments to prevent such abuses so that such issues are not even being registered by institutions or are addressed early on so that proceedings don’t drag out and prove expensive, so that they can be thrown out as early as possible in the course of proceedings.”

RUSSIAN FEDERATION – on the benefits of bilateralism and lack of consistency: “The system is not uniform, it’s a little bit fragmentary but these specificities are to a great degree determined by the nature of investment agreements. Any international investment agreement is the result of an agreement between the parties to that agreement. This explains the divergences that can exist in terms of the content of such agreements. But this is not a problem of the system per se. It’s a problem that has to do with the application of different sets of standards. You can have issues with respect to the quality of the arbitrators themselves, their professionalism, in relation particularly to arbitrators that have been appointed by the parties themselves. This is not either a problem of the system but rather a problem of the arbitrators.”

RUSSIAN FEDERATION – on non-uniformity as an advantage of the system: “The non-uniformity of systems for investment dispute settlement is at the same time its weak point but also its strong point. The absence of a universal system of dispute settlement enables us to take on board regional specificities and appropriately to take into account the positions of the states that entered into investment agreements. Because every single agreement of this kind is the result of a negotiation process. And here you have political questions coming into play, issues related to the trade system that’s in place of course, then the peculiarities of a national legal system. Overall in our view, this is an advantage of the system and not a disadvantage in any way.”

EUROPEAN UNION – on the link between lack of consistency and cost: “This lack of consistency brings significant cost. This is problematic because there is a lack of predictability when analyzing the potential legislative or regulatory activities. This also engenders disputes because it is very often the case that one or the other party in a potential dispute can point to at least one instance in which an interpretation that suits them has been adopted and therefore they are tempted to seek to bring a case when it might not be necessary. In our view, there are differences [among the treaties], but these differences should not be exaggerated. Many countries in the world have negotiated investment treaties on the basis of models and there is a high degree of similarity. Virtually all of these treaties have key core obligations – obligations that we’re all familiar with: the non-discrimination obligations, the expropriation obligations, fair and equal treatment and types of obligations.”

EUROPEAN UNION – on the lack of consistency being a systemic problem: “And in our view this problem is again a systemic problem because it’s a problem which flows from the ad hoc nature of the existing regime that there are always three individuals asked to hear a particular case and they may take a slightly different view or they may take a different view from their predecessors on any particular issue. And we also think that this is related to the fact that there is no broad appeal review that allows to establish some notions of hierarchy and authority within the system.”

MAURITIUS – on the importance of consistency and coherence for the system’s legitimacy: “This question of coherence and consistency is absolutely key. It is the major concern. There is an utter lack of predictability and therefore legitimacy in the framework as it exists today. There is no appeal there is no harmonization system and for that reason and contrary to other views that have been expressed we say it is absolutely a problem of the system because ISDS is by its very nature fragmented and incapable of harmonization in its current form.”

FRANCE – on the lack of coherence and its affect on arbitral appointments: “The absence of coherence in case law has an impact on the choice of arbitrators who are selected on the basis of their affinities for certain approaches. So this can lead to doubts, calls for recusal and can undermine the legitimacy of the system. So all of this justifies the argument that this working group should look at coming up with a global or systemic approach to resolving those issues.”

SPAIN – on the lack of consistency being a systemic problem: “We fully agree with the views that were expressed previously by other distinguished delegations to the extent that they consider that the issue of coherence and consistency of arbitral decisions is a systemic matter because the current system based on ad hoc tribunals creates this difficult issue.”

SPAIN – on the lack of consistency needing a systemic response: “It’s a systemic matter and that’s why it equally requires a systemic response in order to modernize the current system to ensure that coherence and consistency become values in and of themselves. And as a value in and of themselves that means that it is equally necessary to increase the legitimacy of the system in order to thus be able to deal with the criticisms that are being leveled against the system by civil society from states as well, and also in order to increase predictability for the investors themselves who are after all the users of the system.”

ISRAEL – on the drawbacks of aiming for consistency: Emphasized “the importance of allowing each country to fit the formulation of its investment agreements to its needs. Evidently this may cause certain variations regarding the level of protection expected from each agreement. However those variations represents the different approaches countries have towards protection and promotion of investment. Therefore aiming to a consistent system in place, unified standards of treatment which may have drawbacks.”

JAPAN – on the drawbacks of overly looking for consistency: “is that necessarily a bad thing to have three courts arrive at three different conclusions. If consistency is a fundamental quality relating to everything that’s been decided does it mean that the second and third courts should have followed and adopted interpretation already given by the first court. If the answer is yes then where does this unchallenged authority come from for this first court.” Further asked: “if we establish a permanent court of arbitration could we say that this permanent court always and without exception comes up with the appropriate and correct response from the very first instance.” Concluded: “I do think that sometimes an overt or undue search for consistency can have its drawbacks.”

THAILAND – on the negative implications of inconsistency on the credibility of the regime: Emphasized that “it is necessary to endeavor to address concerns related to the lack of consistency and coherence in international investment arbitration,” and noted that “inconsistency and lack of coherence in arbitral awards could have negative implications on the reliability, predictability, and credibility of the ISDS regime as a whole.” However, Thailand also stated that: “consistency may not be systematically desirable in all investment related cases”. “Consistency is not an absolute guarantee for accuracy of treaty interpretation. Let us all bear in mind that an emerging jurisprudence constante based on a defect in legal reasoning is definitely not something desirable. Whether such jurisprudence is incessantly repeated within and institutionalized structure such as an appellate body or by arbitral tribunals established on an ad hoc basis. Such flawed legal reasoning could ultimately lead to decreasing coherence in international investment law. For Thailand, “any attempt of ISDS reform should aim at promoting consistency of interpretation of true purposes of international investment agreements i.e. provide a proper protection of investors in accordance with acceptable international standards of protection as a possible way forward.” Thailand’s proposal for reform would focus on the “creation of procedural rules guiding arbitral tribunals in making appropriate use of joint interpretation mechanisms”, with an “increasing involvement of home state as master of the treaty in the interpretation process of IIAs.”

USA – on whether consistency is necessarily desirable: Noted that “the notion of similar treaty provisions always appropriately being interpreted in the same way is not in our view necessarily a desirable outcome. States have taken a great deal of care in crafting these obligations with great specific intent, and that minute differences in the way they have drafted correspond to very important differences in both legal and policy objectives. While the language may appear to be identical in the provision itself, the rules of treaty interpretation require looking at the broader context including the instrument within which the provision occurs, and the way that that provision may interact with other provisions in those treaties including exceptions, preambles, and other interpretive material. We’ve also noted that in certain cases you may have the same treaty, same provision, and you may have different treatment of it.” But noted that these are “matters of litigation and don’t necessarily point to a broader systemic problem but rather one that is inherent to all forms of litigation.”

EUROPEAN UNION – on lack of consistency where the same words are interpreted differently: “It is obvious that there may indeed be times that it is not intended that the same terms have the same meaning. But that issue as such is not a concern. The concern arises when it is intended that the same words have the same meaning and we have situations where tribunals arrive at different interpretations of those same words. It should be clear that there is an identified concern as regards this question of consistency.”

ROMANIA – on the necessity of a permanent adjudicatory body because of the difficulty of amending first generation BITs: “I would like to emphasize that in terms of consistency and predictability, the issue here is that too many investment treaties that are in force today are first generation BITs. That means that the language that is comprised in those BITs is vague. This vague language invites the tribunal to give an interpretation to the provision of the treaty that, in Romania’s opinion, goes beyond Article 31 of the Vienna Convention. Many would be tempted to say that the treaties themselves are the problem, and not the ISDS mechanism. Well the situation is that we have over 3000 treaties, many of them are first generation BITs. It is very hard, complex process, very time-consuming process to change those BITs and amend them. It often requires that not only both parties are willing to negotiate either in amending the treaty or just simply issuing an interpretive declaration. And the amendments and interpretive declarations need to be vetted and approved at the domestic level. This is a very time-consuming process and it’s almost impossible to solve this issue by amending the treaties. So the obvious solution would be to amend the ISDS mechanism to issue a set of procedural rules for a permanent adjudication body that will be able to interpret even first generation BITs in a manner that is consistent with both the interest of the investor but also with the interest of the states, the host states that receive those investments.”

AUSTRALIA – on consistency, correctness and the importance of striking the right balance: “But consistency is not an end, an objective in itself and one could say it has costs. Consistency does not equal correctness and perfect consistency may have costs in terms of length of proceedings and actual monetary costs. So we are talking about, in all of this, striking the right balance. I think from our perspective, digging down a little into the impact of inconsistency helps us to ensure when we go to the next step that we are focusing on getting the balance right, where we seek to address the inconsistency that there is no doubt exists.”

AUSTRALIA – on the importance of predictability with relation to perceptions: final comment related to “the credibility of this system which is a point Australia referred to in Vienna regarding the relevance of perceptions, the credibility of the system and this relates to all states. So, developed, developing countries that we’ve heard from today, also the investors that obviously is a very important piece of the puzzle and they need predictability as much as the states, but also society.”

CANADA – on the importance of consistency, predictability and correctness: The delegation of Canada does believe that the issue of consistency is “an important issue” and that the “importance is both predictability and correctness. And it is also both balancing the interest of the states and the interests of investors.”

CANADA – on impact of inconsistencies on perceptions: “But we need to consider whether this inconsistency affects predictability and at the very least there is a perception of inconsistency and a perception amongst stakeholders and states and investors that this can be an issue. It affects the legitimacy of the system, but also the ability of governments and investors to know how a tribunal will find what measures may be in contravention of investment treaty, whether it’s worth for an investor to bring a case or not, and also for governments to know what treaty language to use.”

URUGUAY – on the problem of lack of consistency: “We are worried about situations leading to cases where the states lose control of the investments and where things are going. A lack of consistency in interpretation of international treaties by arbitration tribunals means that the same clause can be differently interpreted from the way that was agreed upon in negotiation.”

GERMANY – on the need for systemic reform: “This is about a systemic issue that lies at the very core of ISDS, and that is that there is one tribunal per case that is dissolved after a decision and will not decide a case in the same constitution as before. From that follows that there is no consistency in awards and we have no systematic correction of awards. At the same time we note that consistency is something that is in everybody’s interest who is involved in ISDS proceedings.” The delegate for Germany then added that “the current system has quite considerable systematic disadvantages that we believe need to be corrected and it need to be corrected in a more systemic matter.”

MAURITIUS – on the lack of a system per se and need for systemic reform: “It is true that the law consistently applied to different facts will result in different outcomes. But that’s where the fact of multilateral proceedings comes in. And that’s why I think whenever we are discussing the issues we are discussing in this working group we need to come back to this question of the lack of a system. By its very nature, arbitration is fragmented. Each tribunal is its own master, it doesn’t report to anyone. It has no duty to a system. And for that reason, practitioners are very regularly faced with how to manage multiple proceedings. It can be similar facts being adjudicated by different tribunals You will often have multiple proceedings that are involving the same facts with tribunals with no coherent tool as to how to coordinate their proceedings as to how to make sure that they can all adjudicate on these facts to reach a consistent outcome which may well mean one case is won, one case is lost, but at least the factual findings will be coherent. If you’re a state nowadays you cannot be sure of even that. The existence of a system of review mechanisms which would be systemic have the ability to deal with most of these problems.”

USA – on the importance of correctness and consistency not being the ultimate goal in and of itself: “correctness seems to be the more important criterion. In other words the treaties are interpreted in accordance with the general rules of public international law. If that occurs, then the results will be more predictable and will be more consistent when appropriate. So consistency for its own sake shouldn’t be seen as a primary goal because interpretations that are consistent but wrong need to be avoided. But it’s not in our view necessarily linked to the lack of a review mechanism. Consistency and predictability are affected by many factors that a number of other delegates have mentioned not only differences in treaty drafting and in the facts of disputes but also in the evidence that has presented the tactical choices made by parties to the dispute which can explain differences in outcome even in those cases where there seemed to be facial similarities in the dispute.”

USA – on the importance of finality and enforcement: The delegate for the US stressed that “We need to pay attention to the importance of not undermining finality and ensuring finality helps to prevent further increases in additional costs and duration of cases.” And that “trying to make adjustments elsewhere might add further complexity and process further delays and costs”. For the US, “it’s not just about the perspective of review and the extent of the review but of the enforcement side. We think enforcement mechanisms are central to the resolution of investment disputes and the existing mechanisms generally work well.”

GREECE – on consistency and customary international law: “Starting with the role of precedent, the Greek delegation says that tribunals’ adopting a de facto doctrine of precedent is not uniform in the manner in which they take into account interpretations rulings by other tribunals. In the absence of the doctrine of precedent, prior arbitral awards should not serve as a substitute for legal analysis, including of state practice in the opinio juris, when it comes to standards of customary international law. Regrettably this has happened too many times in the past.”

GREECE – on consistency and joint interpretive statements: “Turning to the issue of joint interpretive statements the experience of arbitration under NAFTA shows that investment tribunals have retained considerable interpretive discretion even in cases where the relevant standards had been subjected to binding interpretive statements of the parties.”

EGYPT – on inconsistency as a consequence of a fragmented regime: “The problem of inconsistency and unpredictability will remain as long as there is this large part of overlapping treaties of international and investment treaties especially the old generations of bilateral investment treaties which involve inaccurate drafting, uncontrolled drafting and indefinite drafting of the rules of the protection of investment.” “If the remit of the work of the current working group does not allow it to address the problematic of the rules of substantive protection of investment, I propose as a minimum recommending at the end of the report of this meeting the importance of embarking on studying the possible solutions to tackle the problem of the fragmentation and plurality of the rules of substantive reflection included in bilateral investment treaties.”

SINGAPORE – on the importance adequate solutions to the inconsistency concern, regardless of what reform is adopted: “In the event that any of all reform efforts lead to a more systemic solution it bears repeating that such a solution must certainly also adequately address and enhance predictability, coherence and finality in the recognition and enforceability of ISDS outcomes and to do so in a more holistic and comprehensive manner than what is currently being achieved to date.”

BAHRAIN – on the importance of not overplaying the level of inconsistency: noted that “little attention was given to the fact that examples of such inconsistency are few in number when compared to the many instances of consistency among the awards and decisions referred to.” And that “it is important not to let the concern over a few cases of inconsistency to get out of proportion as to the causes of inconsistency.” Bahrain added that “I am not fully convinced that replacing the current system will lead to greater predictability.”

KENYA – on the appropriate level of consistency: “It is necessary to consider first the need for an applicable test in determining which decisions or class of decisions should or can be regarded as requiring consistency in an ad hoc system, which by design is fragmented and without a structure for correction. There are as many different views on what is inconsistent as there are legal systems. As it is, there are already various views from the present discussion on what is the perfect consistency, good or bad consistency.”

Concerns about limited review and mechanisms to ensure correctness

USA – on using mechanisms like consolidation to ensure consistency: “In as much as concurrent and multiple proceedings are a challenge, they are a challenge that can be and have been quite effectively addressed in some treaties over the last decade through provisions that create the explicit ability of governments to both ensure that claims relating to the same subject matter cannot be brought in more than one form but also to help ensure that claims that are similar and brought under the same treaty can be consolidated.”

USA – on the importance of consistency compared to other strategic considerations that governments must confronted: “From a government’s perspective there are many strategic considerations that it takes into account when deciding how to manage its cases and that consistency of outcomes or consistency of interpretation might in fact in some cases not be paramount in the government’s considerations. Consistency among decisions is not necessarily a primary aim. The primary aim is consistency with the language of the treaty and consistency with the intent of the treaty parties consistent with an international law interpretation of treaties.”

USA – on the utility of joint interpretations and non-disputing party submissions: “The delegation of the United States, the delegation of Canada and Mexico have pointed out some of the tools that we’ve developed in our practice including in the NAFTA that we believe have helped move toward greater coherence in the jurisprudence. We have had some questions raised very fairly about whether these mechanisms are maximally effective. The distinguished delegate from Korea noted one of the challenges is that these mechanisms have not yet found widespread use in treaty practice, while countries like the United States, to my understanding Canada, Mexico, many in the Americas and in parts of Asia have for the last decade or so or been including provisions in their treaties that foresee binding interpretations, that permit expressly treaty parties to make submissions on issues of interpretation to tribunals. These type of provisions have yet to become more broadly used in treaties and other parts of the world. Their increasing utility, the increasing transparency of cases such that all states and stakeholders can actually have insight into the arguments, into the facts, all of these factors over time will possibly contribute to the greater use and therefore greater efficacy of these tools.”

EUROPEAN UNION – on the issue of inconsistency and costs: Speaking of a case involving a treaty signed by the Belgium/Luxembourg Economic Union, asked: “Do you engage in spending money, on hiring counsel, and preparing litigation when you have three possible interpretations of the same treaty?” Noted that “that there significant issues of cost” and “significant issues of predictability.”

EUROPEAN UNION – on the utility of joint interpretations: “There has been a discussion on the utility of binding interpretations. The European Union believes that binding interpretations are a useful tool amongst the tools that are available to states. Partners can always sit down together and agree that a particular provision that they have drafted in a treaty previously should be interpreted in a particular way. There is no need to pretend a particular clause in a treaty to provide that. But there is a question about how frequently and how effectively one can have binding interpretations that sufficiently deal with all of the issues that we are looking at. It is not something that we can effectively use as a mechanism in particular for disputes that are ongoing. Once we think the notion of binding interpretations is something which is useful we need to understand and accept that there are there its specific use on a day to day basis is in fact limited.”

EUROPEAN UNION – on an appellate mechanism being the most effective way to achieve consistency: establishing an appeal mechanism “is the most effective mechanism at a minimum in a bilateral contact context to provide consistency and coherence because we expect even without an explicit doctrine of stare decisis that nevertheless first instance tribunals will follow what is handed down and what is decided by an appeal mechanism. And so we think that is extremely useful in bringing about consistency. It makes sense in bilateral context. We think that it’s something that should be considered in good time in the context of other multilateral reform.”

AUSTRIA – on the importance of consistency: “There is no such thing as certainty in law. There is no adjudicative body where absolute certainty and consistency can be guaranteed. However we take the view that states as treaty parties should aim at creating environments where consistency is encouraged.”

EUROPEAN UNION – on the question of limited review: “For us it is clear that this question, limited review is a significant concern. We think this notion of limited review makes perfect sense of course when we are talking about commercial arbitration, when the two private parties want to get to a final result, to resolve the dispute and move on. We don’t think that limited review is effective and is appropriate. It raises concerns when we’re dealing with [the] type of public matters and public international law matters that arise in the context of investment treaties. One could cite many examples of concerns being raised. We think the most telling one is the decision of the annulment committee in CMS v. Argentina. There, the annulment committee itself says: “the award contained manifest errors of law”. Nevertheless the annulment committee cannot touch those matters because of course of the limited review provided for under Article 51 of the ICSID convention. And we don’t think that this limited scope of review is acceptable when we’re dealing with [the] type of public law matters that we are looking at here.”

CHINA – on the lack of an effective correction mechanism under the existing system: “Consistency is an important issue and it bears on the certainty and practicability of the rules and this is certainly very crucial, for the host country’s government and for the investors. When we come across with a specific problem, the government of the host country often requires that its own officials would conduct investigation that some of their practices are in line with the regulations and if the practices by the host country are in contravention of relevant rules and provisions. With regard to correction mechanism, we believe that it is relevant to consistency. Under specific conditions, inconsistency could be caused by a lack of a correction mechanism. The parties need to discuss and research if there is any effective correction mechanism under the current system. There are two mechanisms in the investment arbitration first, under the Washington regime and the second is under the UNCITRAL Convention.

Under the Washington Convention the correction mechanism is quite limited because it has only annulment procedure. The negotiation history also indicated that the parties, to establish this annulment committee, was not intended to establish an appellate mechanism. The arbitral tribunal also ruled on several occasions that the ad hoc annulment committee was not a court of appeal. Annulment procedure is not a remedy against an incorrect decision and the annulment procedure cannot substitute the tribunal’s rulings on the merits or substance.

Under the UNCITRAL arbitration rules, there’s also a lack of a correction procedure. The parties may rely on the domestic law of the place of arbitration to refer the arbitral award to domestic courts. And if there was an error due to the differences in applicable law, differences in interpretation rules on treaties and laws, and differences in rules of evidence, judgements of domestic courts, the ruling of the domestic courts thus made would cause widespread controversies and that is very difficult to have the certainty and the predictability. And often, conversely, it would accentuate this inconsistency.

Therefore in the view of the Chinese government, the current system, even if we have some correction arrangements, this is a defective arrangement. It cannot provide systematic and effective correction, institutionalized correction arrangement. China is of the view, with regard to the way forward, the parties should have an in-depth study assessment and make those effective correction mechanism as a focus of our attention. Of course what is more important, if we are to establish a new correction mechanism, then what type of mechanism it should take. And what are the practical problems that we need to resolve by this arrangement? We believe we need to have in-depth discussions into this process.”

SOUTH AFRICA – On the potential solutions to address the major concern of inconsistency: “For this delegation as for many others, consistency is also of grave concern. As we’ve heard from many of the interventions that there are many different reasons for the inconsistency. And we therefore feel that there should be a variety of solutions that is considered and that we look at. So many of the proposals that have been made in terms of joint interpretations by parties two to a BIT, or, as Pakistan has proposed, guidelines for interpretation of some general investment terms, we all think that these are all very valid proposals and that we can look at. Also in terms of domestic reforms that I think many of the delegates just referred to. South Africa has gone through a domestic process to look at our investment regime. We have started to cancel some of our first generation BITs. But what I want to really talk about is that in our view, many of the inconsistent findings are the result of errors of law or of facts by investment tribunals. And we are of the view that there should be a much bigger role for domestic courts in the system. And this is something that I think hasn’t been really raised and something that we need to also consider and there is a need to look at the scope of review and that is in our view currently very narrow. This is something that the EU has referred to, and Canada and some other delegations. As you are aware, arbitration awards can have a major impact on governments not only in terms of the financial impact but especially the impact on public policy development. For example in South Africa, our black economic empowerment policy has been challenged in an ISDS case before. Now that case did not go ahead in the end but if there was a finding against our black economic empowerment policies, that would have had a severe impact on government and also government’s ability to address some of the ills of apartheid. So in our view it is not acceptable that if errors of law or facts is made by an arbitration tribunal that this cannot be addressed and this is something that should be also looked at in this working group.”

FRANCE – on limited review and the need for systemic reform: “The French delegation believes that limited control in ISDS in its origins and practical consequences poses systemic problems which require reforms and solutions like that which is up to the work to be done in this group.”

JAPAN – on the importance of balancing the cost and benefits of a review mechanism: “the introduction of more extensive review needs to let disputing parties to have opportunities to rectify the decision made by tribunals. At this point, we’d like to echo the distinguished delegate from Australia from the viewpoint of emphasizing the need for careful examinations of cost and benefit brought by extensive review mechanism. We would like to note that there might be concerns that abandoning finality of arbitration inherently entails the risk of sacrificing the efficiency of the procedure and cause it to increase in costs. We are afraid that in some cases its function of reasons for review could invite the least that the mechanism could be abused by one of the disputing parties as a means of delaying tactics. We wouldn’t deny that there could be benefits of introducing a second instance. However we consider that such benefits need to be balanced with possible costs.”

VIETNAM – on costs and delay associated with a review mechanism and the importance of joint interpretations and not having errors in initial awards: “The review mechanism may prolong the process of dispute settlement and be more time consuming and more costly for both parties concerned. For the establishment of the review mechanism, we also need to consider the basis for review, the relation between the review mechanism and the current mechanism of annulment of the arbitration award and how to elect members of the review body. We also welcome another solution to correct the inconsistency which is joint statements of states and on interpretation of the relevant BIT. However it should be noted that this solution depends very much on the good faith of those concerned in the ISDS to respect the joint Interpretation is used by state members to the relevant BIT. As we can see the solutions have both pros and cons and my delegation is willing to participate in further discussion to find acceptable solutions to these concerns. It is more important that we should focus more on which is the appropriate mechanism of ISDS in order to ensure that the award will have no error and balance the legitimate interest of both the host state, the home state and the investor concerned.”

MOROCCO – on assuring consistency by establishing and investment court with an appellate level: “We think that consistency can be assured by the establishment of a multilateral body taking the shape of a permanent international investment court and we would favor an approach leading to this. It would provide a greater degree of impartiality and independence for the arbitration system, so that the system can be perceived as credible. We think it’s important that the two bodies involved an arbitration tribunal to have a primary level and then an appeal court.”

SPAIN – on the inadequacy of an appellate mechanism: “We do think it’s very important to underscore the economic factors analyzed in establishing any appellate mechanism. Establishing an appellate mechanism which would be juxtaposed on what we already have would be like having an elephant and an ant together. In economic terms, the transaction costs, the operating costs of the system would be vast and the system would fail to be efficient.”

What are states’ concerns about investor-state dispute settlement (ISDS)? To help answer that question, we have put together four posts that compile the most relevant quotes from the first two meetings of the UNCITRAL Working Group sessions. To facilitate discussions about the desirability of reforms and their potential nature, we have organized these quotes into key themes that emerged during the meetings.

As explained in a previous post, UNCITRAL granted Working Group III a mandate to: (i) identify and consider concerns regarding ISDS; (ii) consider whether reform was desirable in light of any identified concerns; and (iii) if the Working Group were to conclude that reform was desirable, develop any relevant solutions to be recommended to the Commission.

The mandate calls for the process to be “fully transparent” and thus recordings of the session are available online. These posts are in keeping with that call for transparency. They communicate states’ key concerns to other interested stakeholders, which is important given the disconnects that often exist between different communities in the field.

This post will list quotes about two general issues that emerged in the Working Group: whether states should be concerned with facts and perceptions, or just facts; and whether some of the problems identified were systemic in nature or called for systemic solutions. The next three blogs provide quotes about the concerns states raised with respect to the following topics:

Consistency, Predictability and Correctness of Awards

Arbitral Appointments, Incentives and Legitimacy

Costs, Transparency, Third Party Funding and Counterclaims

A few caveats are necessary. Because the purpose of these blog posts is to reflect states’ concerns, views expressed by NGOs and other observers present at the meetings are not included. Although these quotes are intended to be representative, they represent highlights from two weeks of meetings and thus cannot be fully comprehensive. If a concern has already been raised, other states may not intervene to make the same point. We welcome others to supplement this record.

We avoid editorializing because we think that it is important for other stakeholders to hear states’ concerns expressed in their own words. We have grouped states’ concerns under headings but otherwise have kept the interventions on each sub-topic in the order in which they were made. We note that statements made by states in UNCITRAL cannot be taken as final declarations of policy about the positions states will take with respect to potential reforms.

CHILE – on the importance of facts not perceptions and the need to establish a comparator: “It is very important for this group to carry out work based on facts and not perceptions. When we talk about cost and duration, I would like to ask what is a comparator that we are actually using. Are we comparing it to international adjudication processes in general or to a specific country domestic proceeding? We need to work on actual facts and not perceptions. We should first of all establish a comparator, set facts and statistics and assess if this is an issue of perceptions or not.”

AUSTRALIA – on the importance of perceptions and the need to maintain a social license for ISDS: “Just thinking about why we all here, why have our governments spent a considerable amount of money filling this room with some of the best legal minds in their systems. And I think the answer to that is that our countries are concerned about maintaining social license for ISDS. How do we maintain the legitimacy of ISDS? There’s been a number of comments in the room regarding perceptions versus facts and evidence. And I think from Australia’s perspective we certainly view facts and evidence as crucial and very significant and important to this discussion. But for Australia as well I think perceptions matter and I think are key to this idea of social license and if I could just briefly quote a quote from a Chief Justice of the English court: “Justice should not only be done but it should manifestly and undoubtedly be seen to be done again.” From Australia’s perspective I think it’s important that both real and perceived problems should be considered. At the end of the day we are all accountable to the public and we need to coner public perceptions to be relevant. It’s obviously not saying that facts and evidence are not important. But I’d just like to offer a slightly counter view to some of the interventions which have suggested that we shouldn’t be looking at perceptions. I would argue that those perceptions are fundamentally relevant to the discussion that we’re having today.”

CHINA – on perceptions versus facts with regards to transparency: “Transparency is a relatively independent issue. We are of the view that if the working group needs to decide whether we need further work in terms of transparency. We believe that this decision should be based upon facts rather than simply perceptions or theories. As a result, we believe that it is necessary to recall relevant work carried out by international organizations to improve transparency in recent years and that the actual effect of these work including whether these work are satisfactory and can meet our expectation. Whether they’re going to have other implications for example implications upon ISDS duration and the costs.”

USA – on perceptions versus facts with regards to transparency: “The facts are yet to be determined about [the UNCITRAL transparency rules]. But again we think the question of what is the role of transparency in ISDS reform is critical. And it goes to a larger conversation that we’ve had today about the relationship between facts and perceptions and in our view it’s critical. Transparency has been critical in the sense that it is very challenging as a state to challenge some negative perceptions of some treaties or existing rules when we’re acting against a foundation of a lack of transparency.” “Many of the cases that have attracted the most scrutiny and most criticism by stakeholders in the United States have been cases that have been entirely lacking in transparency and so there have been essentially no facts to use to offer as a counter narrative to this negative perception or to concerns about process. And so in our practice again in this greater discussion about the relative importance of facts and perceptions we think they’re linked and we think that having greater transparency is a critical tool to address concerns that can evolve into negative perceptions about ISDS.”

MAURITIUS – on the importance of perceptions: “This delegation begs to differ from those that have expressed the view that perceptions do not matter. We fully and respectfully endorse the views expressed by the distinguished delegate of Australia. Perception matters greatly for it is a basic tenet of the rule of law that justice must not only be done, it must be seen to be done.” “ISDS has now come under attack repeatedly in the mainstream press so that the mechanism that was meant to depoliticize disputes has itself become highly politicized. And we would say distinguished delegates that now rather than fostering trade and development it has become very arguable that this system is hindering trade and development as countries run scared of the legal risks and financial exposures that have come to be associated with the system and therefore with investment flows for there should be no mistake countries and particularly developing countries are deeply concerned. We have all come here to work in good faith on the reform which will rebalance the system and we urge all present here to work towards that end.”

SOUTH AFRICA – on the importance of perceptions: “Equally, like Australia, I believe that perceptions are very important.” Echoed the sentiment that “justice must not be done but should also be seen to be done”

AUSTRIA – on the importance of perceptions: “Obviously I think we can all agree that facts do matter and we are here in this room to establish a factual basis for further policy considerations. However if we look at the bigger picture I think it’s quite fair to say that perceptions do indeed constitute the crucial effect in any policy area and I think we can all agree that states are not always in a situation where they can make their policy choices merely on the basis of figures and numbers.”

CHILE – on perceptions regarding transparency of the proceedings: “Even though we are transparent and we disclose everything, the public is not understanding it because these are very large and extensive legal documents. That’s when the problems of perceptions come in.”

AUSTRALIA – on the relevance of perception regarding the lack of sufficient guarantee of independence and impartiality of individual arbitrators: Regarding the lack of sufficient guarantee of independence and impartiality on the part of the individual arbitrators, Australia “does consider that both real and perceived problems with arbitrator independence, neutrality and accountability must be considered particularly as governments are accountable to the public and we do consider the perceptions to be relevant in this regard. And on that it’s true that there does seem to be a perception at least that arbitrators are at least partially motivated by a desire to be appointed or reappointed by the states or the investors and a perception that there are divisions between state-friendly and investor-friendly arbitrators.”

CANADA – on perceptions versus facts in arbitrator appointments: “We need to look at numbers and facts and we can’t necessarily conclude from those numbers that there is bias. It could be that certain arbitrators have certain views about investment law – that may be a broader interpretation of the FET standard – and this is really not very different from domestic courts. If we look at Supreme Courts in many of our countries, our judges are identified with certain views and we can’t deny that. So what is the difference? The difference really comes back to this idea that arbitrators benefit from the views that they express and they have an interest in being reappointed and that the remuneration in some way influences the procedure, for example that they have no incentive to reject frivolous claims and that it may also influence the outcome. And so we are dealing very much with a perception problem perhaps more so than a true bias. And I say that while being very mindful of the challenges that any alternatives to the current system. The challenges that would be tied to for example developing a permanent tribunal, including difficulties in composition of a balanced tribunal that need representativeness and other criteria. I think Professor Brower, the USCIB, risks of politicization of such a system are real.”

ROMANIA – On perceptions & the arbitrator appointment process: “In our view the parties’ perception of the system is a key element for well-functioning. The distinguished delegate of the US has noted this morning that perceptions of the parties relating to the impartiality of the arbitrators or rather the lack thereof do not necessarily reflect the reality in each individual case. However in this delegation’s opinion, even the recurrence of instances where there is a mere perception of a lack of impartiality which does not necessarily correspond to reality is sufficient to undermine the legitimacy of the system. As it is generally acknowledged, perceptions of fairness of adjudication systems are capable of promoting better compliance, cooperation and deference even in the face of unfavorable decisions. It is this delegation’s submission that the perception of a lack of impartiality in the system and ultimately of a lack of fairness affects its overall efficiency. Should this working group reach the conclusion under its mandate that reform is indeed needed, and we believe it is, then the reform should address these concerns in order to ensure neutrality and impartiality of adjudicators in ISDS procedures. In this sense, a potential sensible approach would be in our view the creation of a judicial body which would guarantee neutrality similar to other fora dealing with international disputes and whose overall impartiality and independence is generally not questioned.”

JAPAN – on the problem of relying on perceptions: “Perception is a magic word, which has the power to turn everything into something illegitimate. Some people say perception is everything and others say perception is nothing. You can turn anything you like as perception. You can deny anything you do not like equally as perception. This is the magic over the word perception. First we need to identify well-founded perceptions, that it was founded on facts and empirical evidence and identify the other perceptions founded on false allegations and misunderstanding. In order to make such distinction between well-founded perceptions and unfounded perceptions, this working group, our discussion showed that there is a need to conduct overarching research in the facts surrounding the reality of practice of investor state arbitration, with the assistance of practitioners and organizations. On unfounded perception, Japan does not consider that the perceptions founded on false allegation or misunderstanding should be ignored if such perception preoccupy the general public. To the contrary we have to face them, we have to address such perceptions. But if we can see that the public perceptions do not refer to reality, what we have to do is not to distract attention but to engage in genuine dialogue with the public in good faith.”

RUSSIA – on not overplaying the relevance of perceptions: “In our opinion, UNICTRAL’s aim is to improve international trade law, and not to work with public opinion. I’m sure that in some states there are problems with the perceptions of this current ISDS system, and there are doubts as to its objectivity and its effectiveness. However there are other opinions too. Basically the issue of perceptions is a subjective one. We believe that perceptions need to be taken into consideration. However, we should not overemphasize the importance of this. If in some specific state, the media has been critical regarding an investment agreement stipulating an arbitration mechanism, the government should explain to society what reasons guided it when it was concluding that particular agreement. But that doesn’t mean that the whole of the international community needs to disrupt this existing system and incidentally that could also have a negative perception to cause negative perceptions in those very same leading media outlets.”

MAURITIUS – on the importance of perceptions: “It ultimately matters little whether these are just perceived problems or real problems because despite investment arbitration being a specialized and technical subject, it now finds itself in the mainstream news far too frequently and always for the wrong reasons. What has happened is that the mechanism which was meant to depoliticize the settlement of disputes between investors and states has itself become highly politicized. And it is thus now arguably hindering rather than fostering trade and investment flows as states that would otherwise welcome such flows run scared of the real or perceived legal risks that are now associated with them. That would by itself be reason enough for reform. Perception is not magic which allows one to conjure something out of nothing. What public opinion perceives as reflected on the first page of The New York Times, of Le Monde, of the Guardian matters greatly. States themselves contribute to that perception.”

The Existence of Systemic Problems or the Need for Systemic Solutions

BRAZIL –on its choice to not use ISDS at all: “There were many reasons why Brazil decided not to have ISDS in its agreements. Some of them coincide with the general critique that many organizations and scholars make regarding ISDS, which is the fact that it may be considered discriminatory against national investors who do not have the chance to resort to international arbitration and must tackle any issues within the domestic courts. This has been as one of the reasons why Brazil historically has decided not to go down this road. So from our perspective, ISDS is intrinsically flawed. No reforms would be enough to redeem the system. At the same time, we fully understand that for those who have adopted the system, reforming the system may make sense and may be needed and may be needed urgently. Again, that’s not the position we take. For us the best solution is simply throw it out of the window and use something different. And we use SSDS, state to state dispute settlement.”

SOUTH AFRICA – on the reform of its investment treaty system: “As South Africa I would like to start off by saying I think as some countries may be aware, South Africa undertook a review of its investment policy, which included its bilateral investment treaties and we have since moved away from the ISDS system and have gone to a state-to-state dispute settlement system. In terms of the issue of costs when it comes to ISDS, we believe that the amounts at stake in investment treaty arbitration are often very high. Claims for compensation do amount to billions of dollars in most cases and in this context entering into treaties with the investor, dispute settlement clauses carry significant financial costs for governments particularly the developing countries whose fiscal position can be seriously affected even when cases have been discontinued or when the outcome is said to be in favor of the state. The state will usually have to bear the exorbitant costs of legal defense and arbitrators fees. Furthermore large claims may serve to sustain threats of arbitration, increasing the bargaining power of investors in informal discussions with governments to water down regulatory measures or to settle a dispute.”

EUROPEAN UNION – on multiple appointments being a systemic issue affecting costs: “Many arbitrators have multiple appointments They are often managing a large number of arbitrators and a large number of cases, and that clearly also puts pressure on their time which is understandable and impacts their ability to draft and deliver and deliberate in order to produce awards within a reasonable period of time. That is another systemic issue which we think has an impact on costs.”

MAURITIUS – on the need for a dual track of bilateral and multilateral reforms: endorsed “the observations made by the distinguished delegate from Australia about the dual track of progress on the revision reform however you want to call it bilateral and multilateral.” It added that “it would have a freezing effect even on their participation here if they felt that somehow those multilateral negotiations we are conducting here would exclude whatever they have chosen to do on a bilateral basis. So I think that message from here should be loud and clear that multilateral and bilateral can and must proceed in parallel.”

POLAND –on the existence of systemic problems and the need for a holistic approach: “[I]n order to identify the problems related to ISDS system, a holistic approach should be taken. These problems are systemic in nature. So they should be neither considered in isolation nor solved by minor adjustments to the current system.”

EUROPEAN UNION – on the need for systemic reform: “I believe we would be hoping to also consider [an] additional transparency element as part of a broader more systemic reform approach also within this working group.” Referring to the origins of UNCITRAL work on transparency, noted that “there was also a feeling that a purely bilateral approach would be suboptimal and that the best way forward would be to have a more multilateral approach to allow to reform the multitude of existing treaties.”

ARGENTINA – on the need for systemic reforms: “Argentina considers it important and necessary to adopt a multilateral approach, necessarily a systemic approach. In other words we need to look at these issues not just from a bilateral point of view but also from a multilateral one. This is the reason why we’re here. We think that to look at these things simply as problems that can be solved by reforming the instruments per se deprives us of the opportunities to have clear rules and standards for all of us.”

AUSTRALIA – on incremental and systemic reforms not being mutually exclusive and the possibility of pursuing a suite of options: “We don’t necessarily see a systemic or multilateral approach versus bilateral or targeted approaches a binary choice and for Australia we’re certainly open to potentially considering both options. We think they can be complementary and I think in the context of this working group we would like to be able to move towards a position of considering a suite of different options some of them potentially multilateral or bilateral some of them more targeted and focused on specific issues which members can potentially engage with as they think is fit.”

SPAIN – on abuse of proceedings and misuse of structures and the need for a multilateral solution: on “the issue of abuse of proceedings and misuse of structures or the use of fund shopping or shell companies for abusive claims. We think that this issue is profoundly linked to the overall benefits of the system. We’ve seen such groups of companies being formed in third countries by domestic investors, the only goal being from that to be able to bring claims against the state by abusing an instrument conceived initially and exclusively for foreign investors. It is essential that these procedural issues be addressed in a multilateral context because they are intimately linked to the legitimacy of the whole system. And we should think and analyze multilateral instruments to prevent such abuses so that such issues are not even being registered by institutions or are addressed early on so that proceedings don’t drag out and prove expensive, so that they can be thrown out as early as possible in the course of proceedings.”

EUROPEAN UNION – on the lack of consistency being a systemic problem: “And in our view this problem is again a systemic problem because it’s a problem which flows from the ad hoc nature of the existing regime that there are always three individuals asked to hear a particular case and they may take a slightly different view or they may take a different view from their predecessors on any particular issue. And we also think that this is related to the fact that there is no broad appeal review that allows to establish some notions of hierarchy and authority within the system.”

FRANCE – on the need for systemic reforms: “The absence of coherence in case law has an impact on the choice of arbitrators who are selected on the basis of their affinities for certain approaches. So this can lead to doubts, calls for recusal and can undermine the legitimacy of the system. So all of this justifies the argument that this working group should look at coming up with a global or systemic approach to resolving those issues.”

SPAIN – on systemic problems requiring a systemic response: “We fully agree with the views that were expressed previously by other distinguished delegations to the extent that they consider that the issue of coherence and consistency of arbitral decisions is a systemic matter because the current system based on ad hoc tribunals creates this difficult issue.” “It’s a systemic matter and that’s why it equally requires a systemic response in order to modernize the current system to ensure that coherence and consistency become values in and of themselves. And as a value in and of themselves that means that it is equally necessary to increase the legitimacy of the system in order to thus be able to deal with the criticisms that are being leveled against the system by civil society from states as well, and also in order to increase predictability for the investors themselves who are after all the users of the system.”

ALGERIA – on the need for in-depth reform: “Either we make the adjustments and we rectify as we should, without delay, or we should expect a rebellion which will reject all of the norms and rules which have been proposed by UNCITRAL, even though UNCITRAL is not responsible for what happens on the ground. But these amendments or rectifications need to be in-depth, they need to be done transparently, they need to go to the next level, an in-depth study of the issues, because sometimes the judgment is given but there is no remedy after that, once the case has been dealt with. It must be a democratic discussion, it must get to the bottom of things and there should not be mocking, or frivolous changes.”

GERMANY – on the need for systematic reform: “This is about a systemic issue that lies at the very core of ISDS, and that is that there is one tribunal per case that is dissolved after a decision and will not decide a case in the same constitution as before. From that follows that there is no consistency in awards and we have no systematic correction of awards. At the same time we note that consistency is something that is in everybody’s interest who is involved in ISDS proceedings.” The delegate for Germany then added that “the current system has quite considerable systematic disadvantages that we believe need to be corrected and it need to be corrected in a more systemic matter.”

MAURITIUS – on inconsistency and the need for systemic reform: “It is true that the law consistently applied to different facts will result in different outcomes. But that’s where the fact of multilateral proceedings comes in. And that’s why I think whenever we are discussing the issues we are discussing in this working group we need to come back to this question of the lack of a system. By its very nature, arbitration is fragmented. Each tribunal is its own master, it doesn’t report to anyone. It has no duty to a system. And for that reason, practitioners are very regularly faced with how to manage multiple proceedings. It can be similar facts being adjudicated by different tribunals You will often have multiple proceedings that are involving the same facts with tribunals with no coherent tool as to how to coordinate their proceedings as to how to make sure that they can all adjudicate on these facts to reach a consistent outcome which may well mean one case is won, one case is lost, but at least the factual findings will be coherent. If you’re a state nowadays you cannot be sure of even that. The existence of a system of review mechanisms which would be systemic have the ability to deal with most of these problems.”

FRANCE – on limited review and the need for systemic reform: “The French delegation believes that limited control in ISDS in its origins and practical consequences poses systemic problems which require reforms and solutions like that which is up to the work to be done in this group.”

SINGAPORE – on the need for a systemic solution to the issue of inconsistency regardless of the reform adopted: “In the event that any of all reform efforts lead to a more systemic solution, it bears repeating that such a solution must certainly also adequately address and enhance predictability, coherence and finality in the recognition and enforceability of ISDS outcomes and to do so in a more holistic and comprehensive manner than what is currently being achieved to date.”

KENYA – on the need for a holistic reform of ISDS: “Speaking from our experience, the piecemeal reform of the ISDS system will not lead to the desired outcome for developing nations. The desired outcome will only be achieved when we begin to consider the substantive issues in an open, frank, free, and transparent manner in this working group, noting the need to fast track the conclusion of a holistic reform process of the ISDS.”

CHINA – on the need for systemic solutions to deal with the independence and impartiality of arbitrators: “We need an approach that is integral, comprehensive in order to systematically deal with the question of independence and impartiality of arbitrators. As a result to ensure the independence and impartiality of arbitrators is a systematic issue one which requires an integral approach in order to resolve the issues.”

CYPRUS – on the need for a systemic reform in relation to arbitrator appointments: “Cyprus echoes the concerns expressed by many of the delegates during the proceedings regarding systematic issues with ISDS, including with respect to the arbitrator appointment process. These concerns include the appointment of repeat players, lack of diversity both in terms of region and gender diversity, and lack of transparency in the appointment process. Slight adjustments to the current arbitrator selection process will continue to be insufficient to address these issues fully. Indeed the parties could be at a disadvantage if they don’t appoint these same repeat players. Promoting increased impartiality and independence of arbitrators can be better achieved through systematic reform, while not compromising on the experience and reputation and competence of the adjudicators.”

GERMANY – on the need for a systemic reform to increase diversity in arbitral appointments: “If you want to increase diversity in the judicial system responsible for settling investment disputes and you likewise want to fight the double hatting problem, then the only solution that you quite have is fundamental systematic reform and that is for the following reasons. If you increase the number of arbitrators or if you limit the number of cases an arbitrator can sit on, that means that this arbitrator has to look for different sources of income to pay for his livelihood. And that usually means, because they have to be experts in their fields, that they have to work as counsels or somewhere in the field of investment arbitration. Increasing diversity without reforming the system as such will increase the double hatting necessarily because otherwise you will not find any people that voluntarily would want to sit as arbitrators.”

SPAIN – on the inherent characteristics of the current system creating nefarious incentives and the need for a systemic response: “What is key here and this is evident from an economic point of view is a matter of incentives. The same person, if you give him incentives of one sort will function in one way and if he has incentives of another sort he’ll function in a different way. The problem facing us is that the existing mechanism, the existing incentives, inter alia compensation and fees. But that’s not the only incentive. I would like to emphasize the fact that the mechanism determining the conduct of those who have to take decisions is of vital importance and here it must be stated clearly that the current incentives current fees foster dependency and bias. It’s a matter of the remuneration. So I think here we are up against a systemic problem, a structural one. As clearly emerges from the documents submitted by the EU and as this is a systemic issue, we can’t improve it to just incrementally. For us, the matter of codes of conduct is identical to an incremental improvement. It’s necessary it’s there but it’s manifestly inadequate.”

PAKISTAN – on the need for systemic reform, not just increasing the pool of potential arbitrators: “Is it the smallness of number that is the cause of problem? I dare say not. It is the design of the system, the way the system is designed, the way arbitrators work, the culture that that design breeds that affects the ultimate outcome of proceedings. So yes by all means, smallness of pool and diversity is a desirable ambition that we should pursue with all the rigor we could muster. But at the same time, without addressing the key fundamental systemic concerns, without addressing the culture of the way the system works it would not affect the ultimate outcome by merely increasing the pool of arbitrators, by merely raising the number of arbitrators. And so I urge this House to consider the deeper systemic questions as we are then merely the cosmetic effect of increasing numbers.”

PAKISTAN – on the need for a systemic reform with respect to arbitral appointments: “Is it the smallness of number that is the cause of problem? I dare say not. It is the design of the system, the way the system is designed, the way arbitrators work, the culture that that design breeds that affects the ultimate outcome of proceedings. So yes by all means, smallness of pool and diversity is a desirable ambition that we should pursue with all the rigor we could muster. But at the same time, without addressing the key fundamental systemic concerns, without addressing the culture of the way the system works it would not affect the ultimate outcome by merely increasing the pool of arbitrators, by merely raising the number of arbitrators. And so I urge this House to consider the deeper systemic questions as we are then merely the cosmetic effect of increasing numbers.”

BAHRAIN – on double hatting not being a sufficient concern to justify abandoning the current system: “The double hatting is raising very serious issues of bias and impropriety in investment arbitration. It is already very problematic in the field of commercial arbitration in some situations. It is even more serious in investment arbitration as the chances of encountering overlapping issues and fact patterns in such a field are even greater. I am not convinced however that the issue justifies abandoning the system of investment arbitration altogether. Solutions can be devised that would not jeopardize the quest for greater diversity in investment arbitration.”

This essay complements a great forthcoming AJIL article by Greg Shaffer & Sergio Puig on “Imperfect Alternatives: Institutional Choice and the Reform of Investment Law.”

In the coming week, I will be posting four blogs on EJIL: Talk! and IELPB on “States’ Concerns about ISDS” co-authored with Zeineb Bouraoui.

The abstract for the essay is copied below:

Abstract: Although the legitimacy of investor-state arbitration has come under fire, states have not (yet) converged on which reforms to pursue. In simplified terms, three main camps have emerged to date:

Incrementalists view the criticisms of the current system as overblown and argue that investor-state arbitration remains the best option available. Hence, they favor retaining the existing dispute resolution system but instituting modest reforms that would redress specific concerns.

Systemic reformers see merit in retaining investors’ ability to file claims directly on the international level, but view investor-state arbitration as a seriously flawed system for dealing with such claims. They champion more significant, systemic reforms, such as replacing investor-state arbitration with a multilateral investment court and appellate body.

Paradigm shifters dismiss the existing system as irrevocably flawed and in need of wholesale replacement. They reject the utility of investors’ making international claims against states, whether before arbitral tribunals or international courts. They embrace a variety of alternatives, such as domestic courts, ombudsmen, and state-to-state arbitration.

Against this backdrop, the United Nations Commission on International Trade Law (UNCITRAL) gave one of its working groups a three-staged mandate to investigate the possible reform of investor-state dispute settlement, which required it, first, to identify and consider concerns about investor-state dispute settlement (ISDS); second, to consider whether reform was desirable in light of any identified concerns; and, third, if reform was desirable, to develop relevant solutions to be recommended to the Commission.

This essay (1) conceptualizes the three main reform approaches that have been advocated to date and identifying the likely strategies of, and risks faced by, the different reform champions; and (2) analyzes UNCITRAL’s role in these reforms as both a venue and an actor navigating a complex series of relationships with other key stakeholders. Pointing to the future, I conclude by identifying the likelihood of ongoing pluralism with respect to different institutional processes for resolving investment disputes and sketching how actors might proceed to develop flexibility both among and within different reform options.

A. REPORT OF THE APPELLATE BODY (WT/DS486/AB/R AND WT/DS486/AB/R/ADD.1) AND REPORT OF THE PANEL (WT/DS486/R, WT/DS486/R/ADD.1 AND WT/DS486/R/CORR.1)

As a third party in this dispute, the United States provided views primarily focused on the interpretation of the DSU with respect to the matter that Pakistan put before the panel. In the course of the panel proceedings, the measure at issue terminated and Pakistan confirmed that it did not seek a recommendation from the panel. In other words, Pakistan confirmed that no dispute remained between the parties that the challenged measure had been brought into conformity with WTO rules. Nevertheless, Pakistan continued to request findings from the panel and later from the Appellate Body.

The European Union appealed the panel’s issuance of findings in this dispute, and the United States supported the EU’s appeal. As we explained, the DSU does not grant WTO adjudicators the authority to issue advisory opinions regarding the interpretation of the covered agreements in the abstract. A complaining party may not structure its case in a manner that in effect would create such an authority. Rather, the WTO dispute settlement system aims to secure a positive solution to a dispute between the parties.

Pakistan confirmed before the panel and on appeal that it did not seek a recommendation from the DSB when it stated “that panels cannot make recommendations on expired measures under Article 19.1 of the DSU.”

Pakistan’s statement that it did not seek a recommendation confirms that there was no dispute between the parties. Rather, as the panel found, Pakistan sought findings because “the parties dispute, on a fundamental level, how investigating authorities should determine the extent to which duty drawback schemes like the [one at issue] may constitute countervailable subsidies within the meaning of the SCM Agreement.”

That is, Pakistan sought an advisory opinion regarding the application of the SCM Agreement in the future – with respect to different duties on different products, and potentially based on different programs.

The appellate report confirms that the finding is advisory in nature. The appellate report appears to agree with the panel that it was relevant to “resolve” the issue under the SCM Agreement because “similar” cases could arise and “similar” reasoning could be applied in those cases.

A disagreement between the parties “on how investigating authorities should” administer the countervailing duty law – in other circumstances not presented in this dispute – does not fall within the terms of reference for the panel – which also delimits appellate review – as set out by the DSB for this dispute.

As the text of the DSU indicates, the terms of reference of a panel under DSU Article 7.1 provide for a panel to make an “objective assessment of the matter”, words we all know well, but to make the “findings as will assist the DSB in making the recommendation” under the DSU to bring a WTO-inconsistent measure into conformity with WTO rules. DSU Article 11, on the function of panels, repeats these words and this structure. But those latter words – to make “findings as will assist the DSB in making the recommendation” under the DSU – were essentially disregarded in the reports before the DSB today.

Where a complaining party requests an adjudicator to make findings not consistent with the terms of reference established by the DSB, the panel must decline to do so. As Pakistan requested findings with respect to the interpretation and application of the SCM Agreement, but no recommendation on the challenged EU measure, the panel should have found Pakistan’s request to be outside its terms of reference and refrained from making the requested, purely advisory, findings on that basis.

We therefore agreed with the EU’s appeal that Pakistan’s alleged “dispute” was a purely advisory exercise. The United States further agrees with the EU that the DSU does not grant WTO adjudicators the authority to issue advisory opinions regarding the interpretation of provisions of the covered agreements in the abstract, and outside the context of resolving a dispute.

The United States has been warning Members for some time about the concern that WTO adjudicators have been giving “findings” that are advisory, or unnecessary to resolve the dispute.

We recall one egregious instance, in the appeal in Argentina – Measures Relating to Trade in Goods and Services, in which more than two-thirds of the Appellate Body’s analysis – 46 pages – was in the nature of obiter dicta. This is not only inconsistent with the DSU and terms of reference established by the DSB, but contributes to delays in dispute settlement and increased complexity for all Members.

This dispute could and should have been resolved upon Pakistan’s statement that it sought no recommendation on the EU’s withdrawn measure. In that circumstance, there were no “findings as w[ould] assist the DSB in making the recommendations” in the DSU. The reports in this dispute were not necessary to resolve a dispute, but rather – as the EU rightly pointed out – an exercise in making unnecessary interpretations.

This is an interesting systemic issue. I haven't counted up how often the situation of terminated measures arises (although we track it in our index), and it would be interesting to assemble the data on this. How many WTO disputes involve measures that have already been terminated? In how many of those cases was the complainant not seeking a recommendation because termination meant that compliance had already been achieved? Some data on all this could help inform the debate. My sense was always that complainants asked for findings in these circumstances due to fear that the measure at issue could be reimposed, but I can't recall all the cases.

It would also be helpful to get a better sense of what the U.S. would like to see change here. Is it a question of how panels and the Appellate Body should behave? Or should there be limits on Members requesting findings where measures have been terminated? Here, the U.S. expressed concern that Pakistan requested findings but not a recommendation. Would things have been different for the U.S. if Pakistan had asked for a recommendation here, and the panel had declined to give one because the measure had expired?

More generally, if the existing DSU rules have led to outcomes the U.S. is unhappy with, what changes to the rules would help resolve things?